Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,”" "smaller reporting company," and “smaller reporting company” and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act. (Check one):
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
GTT Communications, Inc.
Condensed Consolidated StatementStatements of Stockholders’ Equity
(Unaudited)
(Amounts in thousands,millions, except for share data)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
|
| Shares | | Amount |
Balance, March 31, 2019 | 56,227,038 |
| | $ | — |
| | $ | 818.5 |
| | $ | (395.6 | ) | | $ | (62.8 | ) | | $ | 360.1 |
|
Share-based compensation for options issued | — |
| | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
|
Share-based compensation for restricted stock issued | (15,413 | ) | | — |
| | 7.5 |
| | — |
| | — |
| | 7.5 |
|
Tax withholding related to the vesting of restricted stock | (714 | ) | | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
Stock issued in connection with employee stock purchase plan | 19,309 |
| | — |
| | 0.5 |
| | — |
| | — |
| | 0.5 |
|
Stock options exercised | 28,666 |
| | — |
| | 0.4 |
| | — |
| | — |
| | 0.4 |
|
Net loss | — |
| | — |
| | — |
| | (33.3 | ) | | — |
| | (33.3 | ) |
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 20.0 |
| | 20.0 |
|
Balance, June 30, 2019 | 56,258,886 |
| | $ | — |
| | $ | 826.9 |
| | $ | (428.9 | ) | | $ | (42.8 | ) | | $ | 355.2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
|
| | Shares | | Amount |
| | | | | | | | | | | | |
| Balance, December 31, 2016 | 37,228,144 |
| | $ | 3 |
| | $ | 197,326 |
| | $ | (64,641 | ) | | $ | (4,929 | ) | | $ | 127,759 |
|
| | | | | | | | | | | | |
| Share-based compensation for options issued | — |
| | — |
| | 1,029 |
| | — |
| | — |
| | 1,029 |
|
| | | | | | | | | | | | |
| Share-based compensation for restricted stock issued | 858,285 |
| | — |
| | 14,802 |
| | — |
| | — |
| | 14,802 |
|
| | | | | | | | | | | | |
| Tax withholding related to the vesting of restricted stock units | (208,481 | ) | | — |
| | (3,217 | ) | | — |
| | — |
| | (3,217 | ) |
| | | | | | | | | | | | |
| Stock issued in connection with employee stock purchase plan | 21,018 |
| | — |
| | 582 |
| | — |
| | — |
| | 582 |
|
| | | | | | | | | | | | |
| Stock issued in connection with acquisition | 5,179,872 |
| | 1 |
| | 139,740 |
| | — |
| | — |
| | 139,741 |
|
| | | | | | | | | | | | |
| Stock options exercised | 360,444 |
| | — |
| | 1,018 |
| | — |
| | — |
| | 1,018 |
|
| | | | | | | | | | | | |
| Cumulative effect of adjustment for unrecognized windfall benefits | — |
| | — |
| | — |
| | 11,247 |
| | — |
| | 11,247 |
|
| | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | (21,980 | ) | | — |
| | (21,980 | ) |
| | | | | | | | | | | | |
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 984 |
| | 984 |
|
| | | | | | | | | | | | |
| Balance, September 30, 2017 | 43,439,282 |
| | $ | 4 |
| | $ | 351,280 |
| | $ | (75,374 | ) | | $ | (3,945 | ) | | $ | 271,965 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
|
| Shares | | Amount |
Balance, March 31, 2018 | 44,868,585 |
| | $ | — |
| | $ | 365.7 |
| | $ | (155.6 | ) | | $ | (2.8 | ) | | $ | 207.3 |
|
Share-based compensation for options issued | — |
| | — |
| | 0.3 |
| | — |
| | — |
| | 0.3 |
|
Share-based compensation for restricted stock issued | 198,463 |
| | — |
| | 8.5 |
| | — |
| | — |
| | 8.5 |
|
Tax withholding related to the vesting of restricted stock | (102,832 | ) | | — |
| | (5.0 | ) | | — |
| | — |
| | (5.0 | ) |
Stock issued in connection with employee stock purchase plan | 6,801 |
| | — |
| | 0.3 |
| | — |
| | — |
| | 0.3 |
|
Equity offerings, net of issuance costs | 9,589,094 |
| | — |
| | 424.5 |
| | — |
| | — |
| | 424.5 |
|
Stock options exercised | 49,400 |
| | — |
| | 0.6 |
| | — |
| | — |
| | 0.6 |
|
Net loss | — |
| | — |
| | — |
| | (136.3 | ) | | — |
| | (136.3 | ) |
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 2.0 |
| | 2.0 |
|
Balance, June 30, 2018 | 54,609,511 |
| | $ | — |
| | $ | 794.9 |
| | $ | (291.9 | ) | | $ | (0.8 | ) | | $ | 502.2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
|
| Shares | | Amount |
Balance, December 31, 2018 | 55,625,149 |
| | $ | — |
| | $ | 809.9 |
| | $ | (368.3 | ) | | $ | (26.9 | ) | | $ | 414.7 |
|
Share-based compensation for options issued | — |
| | — |
| | 0.3 |
| | — |
| | — |
| | 0.3 |
|
Share-based compensation for restricted stock issued | 546,972 |
| | — |
| | 16.0 |
| | — |
| | — |
| | 16.0 |
|
Tax withholding related to the vesting of restricted stock | (10,021 | ) | | — |
| | (0.4 | ) | | — |
| | — |
| | (0.4 | ) |
Stock issued in connection with employee stock purchase plan | 33,370 |
| | — |
| | 0.6 |
| | — |
| | — |
| | 0.6 |
|
Stock issued in connection with acquisitions | (6,954 | ) | | — |
| | (0.3 | ) | | — |
| | — |
| | (0.3 | ) |
Stock options exercised | 70,370 |
| | — |
| | 0.8 |
| | — |
| | — |
| | 0.8 |
|
Net loss | — |
| | — |
| | — |
| | (60.6 | ) | | — |
| | (60.6 | ) |
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (15.9 | ) | | (15.9 | ) |
Balance, June 30, 2019 | 56,258,886 |
| | $ | — |
| | $ | 826.9 |
| | $ | (428.9 | ) | | $ | (42.8 | ) | | $ | 355.2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
|
| Shares | | Amount |
Balance, December 31, 2017 | 44,531,905 |
| | $ | — |
| | $ | 360.2 |
| | $ | (124.9 | ) | | $ | (3.9 | ) | | $ | 231.4 |
|
Share-based compensation for options issued | — |
| | — |
| | 0.6 |
| | — |
| | — |
| | 0.6 |
|
Share-based compensation for restricted stock issued | 492,534 |
| | — |
| | 14.0 |
| | — |
| | — |
| | 14.0 |
|
Tax withholding related to the vesting of restricted stock | (206,488 | ) | | — |
| | (10.2 | ) | | — |
| | — |
| | (10.2 | ) |
Stock issued in connection with employee stock purchase plan | 12,425 |
| | — |
| | 0.4 |
| | — |
| | — |
| | 0.4 |
|
Stock issued in connection with acquisitions | 79,930 |
| | — |
| | 4.2 |
| | — |
| | — |
| | 4.2 |
|
Equity offerings, net of issuance costs | 9,589,094 |
| | — |
| | 424.5 |
| | — |
| | — |
| | 424.5 |
|
Stock options exercised | 110,111 |
| | — |
| | 1.2 |
| | — |
| | — |
| | 1.2 |
|
Net loss | — |
| | — |
| | — |
| | (167.0 | ) | | — |
| | (167.0 | ) |
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 3.1 |
| | 3.1 |
|
Balance, June 30, 2018 | 54,609,511 |
| | $ | — |
| | $ | 794.9 |
| | $ | (291.9 | ) | | $ | (0.8 | ) | | $ | 502.2 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
GTT Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)millions)
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
| 2017 | | 2016 | 2019 | | 2018 |
Cash flows from operating activities: | |
| | |
| |
| | |
|
Net (loss) income | $ | (21,980 | ) | | $ | 6,114 |
| |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | |
Net loss | | $ | (60.6 | ) | | $ | (167.0 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Depreciation and amortization | 94,670 |
| | 46,139 |
| 124.0 |
| | 88.0 |
|
Share-based compensation | 15,960 |
| | 10,896 |
| 16.3 |
| | 14.6 |
|
Debt discount amortization | 498 |
| | 600 |
| 3.5 |
| | 0.2 |
|
Loss on debt extinguishment | 8,647 |
| | 1,632 |
| — |
| | 13.8 |
|
Amortization of debt issuance costs | 2,638 |
| | 1,188 |
| 2.3 |
| | 2.3 |
|
Change in fair value of derivative financial liability | | 35.2 |
| | 115.3 |
|
Excess tax benefit from stock-based compensation | (5,365 | ) | | — |
| 0.6 |
| | (4.7 | ) |
Deferred income taxes | (18,347 | ) | | — |
| (2.4 | ) | | 4.2 |
|
Non-cash deferred revenue | (28,018 | ) | | (4,964 | ) | |
Non-cash deferred costs | 4,253 |
| | 1,999 |
| |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
Accounts receivable, net | (7,375 | ) | | (19,887 | ) | (72.4 | ) | | (1.0 | ) |
Prepaid expenses and other current assets | 3,762 |
| | (1,180 | ) | 2.9 |
| | 17.4 |
|
Deferred costs and other assets | (500 | ) | | (4,358 | ) | |
Other long-term assets | | (3.0 | ) | | (14.2 | ) |
Accounts payable | (15,680 | ) | | (8,816 | ) | 34.8 |
| | 9.5 |
|
Accrued expenses and other current liabilities | 24,093 |
| | (3,605 | ) | (31.8 | ) | | (42.5 | ) |
Deferred revenue and other liabilities | (10,165 | ) | | 7,009 |
| |
Operating lease liabilities | | (6.3 | ) | | — |
|
Deferred revenue | | (12.6 | ) | | (8.4 | ) |
Other long-term liabilities | | 0.7 |
| | 1.0 |
|
Net cash provided by operating activities | 47,091 |
| | 32,767 |
| 31.2 |
| | 28.5 |
|
| | | | | | |
Cash flows from investing activities: | |
| | | |
| | |
Acquisition of businesses, net of cash acquired | (652,776 | ) | | (14,146 | ) | (0.5 | ) | | (2,207.4 | ) |
Purchase of customer contracts | (14,943 | ) | | (6,000 | ) | (0.2 | ) | | — |
|
Change in restricted cash and cash equivalents | 304,266 |
| | — |
| |
Settlement of deal-contingent foreign currency hedge | | — |
| | (105.8 | ) |
Purchases of property and equipment | (26,865 | ) | | (17,813 | ) | (51.3 | ) | | (32.5 | ) |
Net cash used in investing activities | (390,318 | ) | | (37,959 | ) | (52.0 | ) | | (2,345.7 | ) |
| | | | | | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from revolving line of credit | — |
| | 33,000 |
| 26.0 |
| | — |
|
Repayment of revolving line of credit | (20,000 | ) | | (32,000 | ) | |
Proceeds from term loan | 696,500 |
| | 29,850 |
| |
Repayment of term loan | (431,025 | ) | | (3,150 | ) | |
Proceeds from senior note | 159,000 |
| | — |
| |
Payment of earn-out and holdbacks | (22,646 | ) | | (15,563 | ) | |
Debt issuance costs | (29,881 | ) | | (904 | ) | |
Repayment of capital leases | (981 | ) | | (1,433 | ) | |
Proceeds from term loans | | — |
| | 2,634.5 |
|
Repayment of term loans | | (13.1 | ) | | (693.0 | ) |
Repayment of other secured borrowings | | (8.0 | ) | | (1.3 | ) |
Payment of holdbacks | | (6.5 | ) | | (9.4 | ) |
Debt issuance costs paid to third parties and lenders | | (0.2 | ) | | (58.5 | ) |
Proceeds from equity issuance, net of issuance costs | | — |
| | 424.5 |
|
Repayment of finance leases | | (0.6 | ) | | (1.7 | ) |
Proceeds from issuance of common stock under employee stock purchase plan | 453 |
| | 1,045 |
| 0.8 |
| | 0.4 |
|
Tax withholding related to the vesting of restricted stock units | (3,217 | ) | | (3,442 | ) | |
Tax withholding related to the vesting of restricted stock | | (0.4 | ) | | (10.2 | ) |
Exercise of stock options | 1,018 |
| | 468 |
| 0.8 |
| | 1.2 |
|
Net cash provided by financing activities | 349,221 |
| | 7,871 |
| |
Net cash (used in) provided by financing activities | | (1.2 | ) | | 2,286.5 |
|
| | | | | | |
Effect of exchange rate changes on cash | (943 | ) | | (1,902 | ) | 0.4 |
| | 3.2 |
|
| | | | | | |
Net increase in cash and cash equivalents | 5,051 |
| | 777 |
| |
Net decrease in cash, cash equivalents, and restricted cash | | (21.6 | ) | | (27.5 | ) |
| | | | | | |
Cash and cash equivalents at beginning of period | 29,748 |
| | 14,630 |
| |
Cash, cash equivalents, and restricted cash at beginning of period | | 55.3 |
| | 101.2 |
|
| | | | | | |
Cash and cash equivalents at end of period | $ | 34,799 |
| | $ | 15,407 |
| |
Cash, cash equivalents, and restricted cash at end of period | | $ | 33.7 |
| | $ | 73.7 |
|
| | | | | | |
Supplemental disclosure of cash flow information: | |
| | |
| |
| | |
|
Cash paid for interest | $ | 38,984 |
| | $ | 19,894 |
| $ | 65.4 |
| | $ | 61.3 |
|
Cash paid for income taxes, net of refunds | $ | 587 |
| | $ | 408 |
| |
Cash paid for income taxes, net | | $ | 0.5 |
| | $ | 0.4 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
GTT Communications, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 — ORGANIZATION AND BUSINESS
Organization and Business
GTT Communications, Inc. (“GTT”("GTT" or the "Company") is a providerserves large enterprise and carrier clients with complex national and global networking needs, and differentiates itself from the competition by providing an outstanding service experience built on its core values of cloud networking services to multinational clients.simplicity, speed and agility. The Company offersoperates a broad portfolio of global services including: private networking services, Internet services, optical transport, managed networking and security services, voice and unified communication services, and video transport services.
GTT's global Tier 1 IPinternet network delivers connectivity to clients aroundranked among the world.largest in the industry, and owns a fiber network that includes an expansive pan-European footprint and subsea cables. The Company's global network includes over 600 points of presence ("PoPs") spanning six continents, and the Company provides services to leading multinational enterprise, carrier, and government customers.in more than 140 countries.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the fiscal year ended December 31, 2016,2018, included in the Company’s Annual Report on Form 10-K filed on March 8, 2017.1, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to such rules and regulations.
The condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial position and its results of operations. The operating results for the three and ninesix months ended SeptemberJune 30, 20172019 are not necessarily indicative of the results to be expected for the full fiscal year 20172019 or for any other interim period. The December 31, 20162018 consolidated balance sheet is condensed from the audited financial statements as of that date, but does not include all disclosures required by GAAP.date.
Reclassification Within Condensed Consolidated StatementChanges in Basis of Cash FlowsPresentation and Accounting
As a result of policy alignments related to acquired businesses, certainCertain prior period amounts in the condensed consolidated statementsstatement of cash flows have been reclassified to conform with the current period presentation to better reflect the nature of these activities. The Company has reclassified $5.0 million from the "Deferred revenue and other liabilities" line to the "Non-cash deferred revenue" line and $2.0 million from the "Deferred costs and other assets" line to the "Non-cash deferred costs" line for the nine months ended September 30, 2016. These reclassifications had no impact on the nettotal change in cashdeferred revenue into a single line item as well as changes in operating assets and cash equivalents or cash flows from operating, investing and financing activities for any periods presented.liabilities to more closely align with the related condensed consolidated balance sheet caption.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates are used when establishing allowances for doubtful accounts, and accruals for billing disputes and exit activities, determining useful lives for depreciation and amortization, and accruals for exit activities, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, assessing the fair value of derivative financial instruments, accounting for income taxes and related valuation allowances against deferred tax assets, and estimating the grant date fair values used to compute the share-based compensation expense. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.
Segment Reporting
The Company reports operating results and financial data in one operating and reporting segment. The Company's Chief Executive Officer is the chief operating decision maker and manages the Company as a single profit center in order to promote collaboration, provide comprehensive service offerings across its entire customer base, and provide incentives to employees based on the success
of the organization as a whole. Although certain information regarding selected products or services areis discussed for purposes of promoting an understanding of the Company's complex business, the chief operating decision maker manages the Company and
allocates resources at the consolidated level. Additionally, integration efforts related to Interoute Communications Holdings, S.A. ("Interoute") are nearing completion, but have not currently changed the manner in which the chief operating decision maker has managed the consolidated business. These integration efforts are designed to establish scale and align Interoute's network assets and product offerings within the existing business.
Revenue Recognition
The Company delivers six primaryCompany's revenue is derived primarily from telecommunications services, which includes both revenue from contracts with customers and lease revenues. Lease revenue services include dark fiber, duct, and colocation services. All other services are considered revenue from contracts with customers. Revenue from contracts with customers is recognized when services are provided to its customers — optical transport, WAN connectivity services, high bandwidth Internet connectivity services, managed network and security services, global communication and collaboration services, and video transport services. Certain of its current commercial activities have featuresthe customer, in an amount that may be considered multiple elements, specifically whenreflects the consideration the Company sells its connectivity servicesexpects to receive in additionexchange for those services. Lease revenue represents an arrangement where the customer has the right to customer premise equipment ("CPE"). The Company believes that there is sufficient evidence to determine each element’s fair valueuse an identified asset for a specified term and as a result, in those arrangements where there are multiple elements, the servicesuch revenue is recorded ratablyrecognized over the term the customer is given exclusive access to the asset.
The Company's comprehensive portfolio of the agreementcloud networking services includes: wide area networking; internet services; transport & infrastructure services; voice services; and the equipment is accounted for as a sale, at the time of sale as long as collectability is reasonably assured.other managed services.
The Company's services are provided under contracts that typically include an installation or provisioning charge along with payments of recurring charges on a monthly basis for use of the services over a committed term. ItsThe Company's contracts with customers specify the terms and conditions for providing such services, including installation date, recurring and non-recurring fees, payment terms, and length of term. These contracts call for the Company to provide the service in question (e.g., data transmission between point A and point Z), to manage the activation process, and to provide ongoing support (in the form of service maintenance and trouble-shooting) during the service term. The contracts do not typically provide the customer any rights to use specifically identifiable assets. Furthermore, the contracts generally provide the Company with discretion to engineer (or re-engineer) a particular network solution to satisfy each customer’s data transmission requirement, and typically prohibit physical access by the customer to the network infrastructure used by the Company and its suppliers to deliver the services.
The Company recognizes revenue as follows:
Recurring Revenue. Recurring revenue represents the substantial majority of the Company's revenue, and consists of feesFees charged for ongoing services that are generally fixed in price and billed on a recurring monthly basis (one month in advance) for a specified term. Fees may also be based on specific usage of the related services, or usage above a fixed threshold, which are billed monthly in arrears. The usage based fees represent variable consideration, however, the nature of the fees are such that the Company is not able to estimate these amounts with a high degree of certainty and therefore the usage based fees are excluded from the transaction price and are instead recognized as revenue based on actual usage charges billed using the rates and/or thresholds specified in each contract. At the end of the term, most contracts provide for a continuation of services on the same terms, either for a specified renewal period (e.g., one year) or on a month-to-month basis. TheRevenue is generally recognized over time for these contracts as the customers simultaneously receive and consume the benefit of the service as the Company records recurring revenueperforms. Fees may also be billed for early terminations based on the fees agreed to in each contract, as long as the contract is in effect.
Usage Revenue. Usage revenue represents variable charges for certain services, based on specific usage of those services, or usage above a fixed threshold, billed monthly in arrears.contractually stated amounts. The Company records usage revenue based on actual usage charges billed using the rates and/or thresholds specified in each contract.
Non-recurring Revenue. Non-recurring revenue consists of charges for installation in connection with the delivery of recurring communications services, late payments, cancellation fees, early termination fees represent variable consideration. The Company estimates the amount of variable consideration it expects to be entitled to receive for such arrangements using the expected value method.
The Company does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Primary geographical market. The Company’s operations are located primarily in the United States and equipment sales. Fees billed forEurope. The nature and timing of revenue from contracts with customers across geographic markets is similar. The following table presents the Company's revenue from contracts with customers disaggregated by primary geographic market based on legal entities (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Primary geographic market: | | | | | | | |
United States | $ | 195.7 |
| | $ | 189.7 |
| | $ | 397.3 |
| | $ | 379.6 |
|
Europe | 186.1 |
| | 120.4 |
| | 382.1 |
| | 179.3 |
|
Other | 11.5 |
| | 3.2 |
| | 23.3 |
| | 9.4 |
|
Total revenue from contracts with customers | 393.3 |
| | 313.3 |
| | 802.7 |
| | 568.3 |
|
Lease revenue | 40.5 |
| | 13.5 |
| | 81.3 |
| | 19.1 |
|
Total telecommunications services revenue | $ | 433.8 |
| | $ | 326.8 |
| | $ | 884.0 |
| | $ | 587.4 |
|
Contracts with multiple performance obligations. The majority of the Company’s contracts with customers have a single performance obligation - telecommunication services. The related installation services are initially recorded as deferred revenue then recognized ratably overgenerally considered not material within the contractual termcontext of the recurring service. Fees charged for late payments, cancellation (pre-installation) or early termination (post-installation) are typically fixed or determinable per the terms of the respective contract and are recognizedthe Company does not recognize these immaterial promised services as revenuea separate performance obligation. Certain contracts with customers may include multiple performance obligations, specifically when billed. In addition, from time to time the Company sells communications and/its connectivity services in addition to customer premise equipment ("CPE"). For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. The standalone selling price for each performance obligation is based on observable prices charged to customers in similar transactions or networking equipmentusing expected cost plus margin.
The Company applies permitted practical expedients to its customers in connection with its data networking services.revenue recognition. The Company recognizes revenue fromdoes not adjust the salepromised amount of equipmentconsideration for the effects of a significant financing component if the Company expects, at contract inception, that the contracted selling priceperiod between when titlethe Company transfers a promised good or service to the equipment passes toa customer and when the customer (generally F.O.B. origin).pays for that good or service will be one year or less.
Prepaid Capacity Sales and Indefeasible Right to Use. From time to time theThe Company sells capacity on a long-term basis, where a certain portion of the contracted revenue is prepaid upon acceptance of the service by the customer. This prepaid amount is initially recorded as deferred revenue and amortized ratably over the term of the contract. Certain of these prepaid capacity sales are in the form of Indefeasible Rights to Use ("IRUs"), where the customer has the right to use the capacity for the life of the fiber optic cable.cable for a specified term. The Company records revenues from these prepaid leases of fiber optic cable IRUs over the term that the customer is given exclusive access to the assets, generally 20 years, consistent with our assumed useful life of the associated fiber optic cable.assets.
The Company records revenue only when collectability is reasonably assured, irrespective of the type of revenue.
Universal Service Fund ("USF"), Gross Receipts Taxes and Other Surcharges
Surcharges.The Company is liable in certain cases for collecting regulatory fees and/or certain sales taxes from its customers and remitting the fees and taxes to the applicable governing authorities. WhereTaxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company collectsfrom a customer, are excluded from revenue. Conversely, USF contributions are assessed to the Company by and paid to the Universal Service Administration Company ("USAC") and are based on behalfthe Company’s interstate and inter-nation end-user revenues. The Company may assess its customers a separate fee to recoup its USF expense. These fees are included in telecommunications services revenue and costs of telecommunications services. USF fees and other surcharges billed to customers and recorded on a regulatory agency,gross basis (as service telecommunications services revenue and cost of telecommunications services) were $5.9 million and $5.7 million for the three months ended June 30, 2019 and 2018, respectively, and $11.8 million and $12.3 million for the six months ended June 30, 2019 and 2018, respectively.
Contract balances. Contract assets consist of conditional or unconditional rights to consideration. Accounts receivable represent amounts billed to customers where the Company has an enforceable right to payment for performance completed to date (i.e., unconditional rights to consideration). The Company does not record anyhave contract assets that represent conditional rights to consideration. The Company’s accounts receivable balance at June 30, 2019 and December 31, 2018 includes $214.9 million and $157.6 million, respectively, related to contracts with customers. There were no other contract assets as of June 30, 2019 or December 31, 2018.
Contract liabilities are generally limited to deferred revenue. Deferred revenue is a contract liability, representing advance consideration received from customers primarily related to the pre-paid capacity sales noted above, where transfer of control occurs over time, and therefore revenue is recognized over the related contractual service period. The Company's contract liabilities were $71.8 million and $75.7 million as of June 30, 2019 and December 31, 2018, respectively. The change in contract liabilities during the six months ended June 30, 2019 included $14.7 million for revenue recognized that was included in the contract liability balance as of January 1, 2019 and $11.2 million for new contract liabilities net of amounts recognized as revenue during the period.
The following table includes estimated revenue from contracts with customers expected to be recognized for each of the years subsequent to June 30, 2019 related to performance obligations that are unsatisfied (or partially unsatisfied) at June 30, 2019 and have an original expected duration of greater than one year (amounts in millions):
|
| | | |
2019 remaining | $ | 12.8 |
|
2020 | 13.5 |
|
2021 | 11.8 |
|
2022 | 11.3 |
|
2023 | 9.8 |
|
2024 and beyond | 12.6 |
|
| $ | 71.8 |
|
For a table of estimated revenue to be recognized for consolidated deferred revenue for each of the years subsequent to June 30, 2019 refer to Note 6 - Deferred revenue.
Deferred costs to obtain a contract. The Company records applicable taxesdefers sales commissions earned by its sales force when they are considered to be incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit which is determined by taking into consideration the Company's customer contracts and other factors. Amortization of sales commissions expense is included in selling, general and administrative expenses. Installation costs related to provisioning of communications services that the Company incurs from third-party suppliers, directly attributable and necessary to fulfill particular service contracts, and which costs would not have been incurred but for the occurrence of that service contract, are recorded as deferred contract costs and expensed ratably over the contractual term of service in the same manner as the deferred revenue arising from that contract. Based on a net basis.historical experience, the Company believes the initial contractual term is the best estimate for the period of earnings.
Deferred sales commissions were $6.6 million and $3.4 million as of June 30, 2019 and December 31, 2018, respectively. There were no other significant amounts of assets recorded related to contract costs as of June 30, 2019 or December 31, 2018.
Cost of Telecommunications Services
Cost of telecommunications services includes direct costs incurred in accessing other telecommunications providers’ networks in order to maintain the Company's global Tier 1 IP network and provide telecommunication services to the Company's customers, including access, co-location, usage-based charges, and usage-based charges.certain excise taxes and surcharges recorded on a gross basis.
Leases
A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (i.e., an identified asset) for a period of time in exchange for consideration.
Lessee
Lease contracts from a lessee perspective are classified as either operating or finance. Operating leases are included in Operating lease right of use assets, Operating lease liabilities, and Operating lease liabilities, long-term portion. Finance leases are included in Property and equipment, net, Finance lease liabilities, and Finance lease liabilities, long-term portion.
For operating leases, the Company recognizes a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments. The Company uses its incremental borrowing rate for leases which do not have a readily determinable implicit rate to determine the present value of the lease payments. The Company’s incremental borrowing rates are the rates of interest that it would have to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. Operating leases result in a straight-line lease expense, while finance leases result in an accelerated expense pattern.
The lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option. The Company considers a number of factors when evaluating whether the options in its lease contracts are reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties.
Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and non-lease components that transfer an additional service to the Company, such as common area maintenance services. The Company has elected not to separate the accounting for lease components and non-lease components for lessee contracts, for all classes of leased assets except for its dark fiber arrangements.
Lessor
Lease contracts from a lessor perspective are classified as either sales-type, direct financing, or operating. Lessor arrangements include dark fiber, duct, and colocation services. The arrangements are operating leases that can also include non-lease components such as operations and maintenance or power services. For its dark fiber and duct arrangements, the Company accounts for lease
and non-lease components separately. Revenue attributable to the lease components in these arrangements is recognized on a straight-line basis over the term of the lease while revenue attributable to non-lease components is accounted for in accordance with other applicable GAAP. The Company has elected not to separate the accounting for non-lease components from lease components in its accounting for colocation arrangements.
Marketing and Advertising Costs
Costs related to marketing and advertising are expensed as incurred and included in selling, general and administrative expenses in the condensed consolidated statements of operations. Third-party marketing and advertising expense was $2.5 million and $2.4 million for the three months ended June 30, 2019 and 2018, respectively, and $5.1 million and $4.1 million for the six months ended June 30, 2019 and 2018, respectively.
Share-Based Compensation
The Company issues three types of equity grants under its share-based compensation plan: time-based restricted stock, time-based stock options, and performance-based restricted stock. The time-based restricted stock and stock options generally vest over a four-yearfour year period, contingent upon meeting the requisite service period requirement. Performance awards typically vest over a shorter period, e.g. one to two years, starting when the performance criteria established in the grant have been met.
The share price of the Company's common stock as reported on the NYSE MKTNew York Stock Exchange ("NYSE") on the date of grant is used as the fair value for all restricted stock. The Company uses the Black-Scholes option-pricing model to determine the estimated fair value for stock options. Critical inputs into the Black-Scholes option-pricing model include the following: option exercise price;price, fair value of the stock;stock price, expected life of the option;option, annualized volatility of the stock;stock, annual rate of quarterly dividends on the stock;stock, and risk-free interest rate.
Implied volatility is calculated as of each grant date based on our historical stock price volatility along with an assessment of a peer group. Other than the expected life of the option, volatility is the most sensitive input to our option grants. The risk-free interest rate used in the Black-Scholes option-pricing model is determined by referencing the U.S. Treasury yield curve rates with the remaining term equal to the expected life assumed at the date of grant. Forfeitures are estimated based on our historical analysis of attrition levels. Forfeiture estimates are updated quarterly for actual forfeitures.
The share-based compensation expense for time-based restricted stock and stock options is recognized on a straight-line basis over the vesting period. The Company recognizesbegins recognizing share-based compensation expense for performance awards when the Company considers the achievement of the performance criteria to be probable.probable through the expected vesting period.
Income Taxes
Income taxes are accounted for under the asset and liability method pursuant to GAAP. Under this method, deferred tax assets and liabilities are recognized for the expected future consequencesimpacts attributable to the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. Further, deferred tax assets are recognized for the expected realization of available net operating loss and tax credit carryforwards. A valuation allowance is recorded on gross deferred tax assets when it is “more"more likely than not”not" that such asset will not be realized. When evaluating the realizability of deferred tax assets, all evidence, both positive and negative, is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies, and expectations of future earnings. The Company reviews its deferred tax assets on a quarterly basis to determine if a valuation allowance is required based upon these factors. Changes in the Company's assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in additional expense or benefit in the period of change.
The Company's income tax provision includes U.S. federal, state, local, and foreign income taxes and is based on pre-tax income or loss. In determining the annual effective income tax rate, the Company analyzes various factors, including its annual earnings and taxing jurisdictions in which the earnings were generated, transfer pricing methods, the impact of state and local income taxes, and its ability to use tax credits and net operating loss carryforwards.
Under GAAP, for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is “more"more likely than not”not" to be sustained upon examination. The Company analyzes its tax filing positions in all of the U.S. federal, state, local, and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines that uncertainties in tax positions exist, a liability is established in the consolidated financial statements. The Company recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes.
Comprehensive (Loss) IncomeLoss
In addition to net (loss) income,loss, comprehensive (loss) incomeloss includes certain charges or credits to equity occurring other than as a result of transactions with stockholders. For the Company, this consists of foreign currency translation adjustments.
(Loss) EarningsLoss Per Share
Basic (loss) earningsloss per share is computed by dividing net (loss) incomeloss available to common stockholders by the weighted average number of common shares outstanding. Diluted (loss) earningsloss per share reflect,reflects, in periods with earnings and in which they haveit has a dilutive effect, the effect of common shares issuable upon exercise of stock options.options and warrants.
The table below details the calculations of (loss) earningsloss per share (in thousands,millions, except for share and per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Numerator for basic and diluted EPS – net loss available to common stockholders | $ | (33.3 | ) | | $ | (136.3 | ) | | $ | (60.6 | ) | | $ | (167.0 | ) |
Denominator for basic EPS – weighted average shares | 56,248,530 |
| | 48,221,341 |
| | 56,045,002 |
| | 46,435,245 |
|
Effect of dilutive securities | — |
| | — |
| | — |
| | — |
|
Denominator for diluted EPS – weighted average shares | 56,248,530 |
| | 48,221,341 |
| | 56,045,002 |
| | 46,435,245 |
|
| | | | | | | |
Loss per share: | | | | | | | |
Basic | $ | (0.59 | ) | | $ | (2.83 | ) | | $ | (1.08 | ) | | $ | (3.60 | ) |
Diluted | $ | (0.59 | ) | | $ | (2.83 | ) | | $ | (1.08 | ) | | $ | (3.60 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Numerator for basic and diluted EPS – (loss) earnings available to common stockholders | $ | (9,519 | ) | | $ | 5,127 |
| | $ | (21,980 | ) | | $ | 6,114 |
|
Denominator for basic EPS – weighted average shares | 41,762,693 |
| | 37,152,063 |
| | 41,160,317 |
| | 36,998,607 |
|
Effect of dilutive securities | — |
| | 633,858 |
| | — |
| | 482,807 |
|
Denominator for diluted EPS – weighted average shares | 41,762,693 |
| | 37,785,921 |
| | 41,160,317 |
| | 37,481,414 |
|
| | | | | | | |
(Loss) earnings per share: basic | $ | (0.23 | ) | | $ | 0.14 |
| | $ | (0.53 | ) | | $ | 0.17 |
|
(Loss) earnings per share: diluted | $ | (0.23 | ) | | $ | 0.14 |
| | $ | (0.53 | ) | | $ | 0.16 |
|
All of theoutstanding stock options were anti-dilutive as of SeptemberJune 30, 20172019 and 2018 due to the net loss incurred during the period.periods. There were approximately 4,000 anti-dilutive common shares that were excluded from the computation of earnings per share446,000 and 576,000 outstanding stock options as of SeptemberJune 30, 2016. 2019 and 2018, respectively.
Cash and Cash Equivalents
Cash and cash equivalents may include deposits with financial institutions as well as short-term money market instruments, certificates of deposit and debt instruments with maturities of three months or less when purchased.
The Company invests its cash and cash equivalents and short-term investments in accordance with the terms and conditions of its 2018 Credit Agreement, which seeks to ensure both liquidity and safety of principal. The Company’s policy limits investments to instruments issued by the U.S. government and commercial institutions with strong investment grade credit ratings, and places restrictions on the length of maturity. As of SeptemberJune 30, 2017,2019, the Company held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles, or non-government guaranteed mortgage-backed securities.
Restricted Cash and Cash Equivalents
Cash and cash equivalents that are contractually restricted from operating use are classified as restricted cash and cash equivalents. InThe Company had no restricted cash and cash equivalents as of June 30, 2019 or December 2016, the Company completed a private offering of $300.0 million aggregate principal amount of 7.875% senior unsecured notes due in 2024. The proceeds of the private offering plus 60 days of prepaid interest, were deposited into escrow, where the funds remained until the closing of the acquisition of Hibernia Networks ("Hibernia") that occurred in January 2017. The proceeds were released from escrow at closing to fund the Hibernia acquisition.31, 2018.
Accounts Receivable, Net
Accounts receivable balances are stated at amounts due from the customer net of an allowance for doubtful accounts. Credit extended is based on an evaluation of the customer’s financial condition and is granted to qualified customers on an unsecured basis.
The Company, pursuant to its standard service contracts, is typically entitled to impose a monthly finance charge of a certain percentage per month with respect to amounts that are past due. The Company’s standard terms require payment within 30 days of the date of the invoice. The Company treats invoices as past due when they remain unpaid, in whole or in part, beyond the payment date set forth in the applicable service contract.
The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, the customer’s payment history and current ability to pay its obligation to the Company, and the condition of the general economy. Specific reserves are also established on a case-by-case basis by management. Credit losses have historically been within management's estimates. Actual bad debts, when determined, reduce the allowance, the adequacy of which management then reassesses. The Company writes off accounts after a determination by management that the amounts at issue are no longer likely to be collected, following the exercise of reasonable collection efforts, and upon management's determination that the costs of pursuing collection outweighsoutweigh the likelihood of recovery. The allowance for doubtful accounts was $3.8$12.1 million and $2.7$11.1 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.
Deferred Costs
Installation costs related to provisioning of recurring communications services that the Company incurs from independent third party suppliers, directly attributable and necessary to fulfill a particular service contract, and which would not have been incurred but for the occurrence of that service contract, are recorded as deferred costs and expensed ratably over the contractual term of service in the same manner as the deferred revenue arising from that contract. Based on historical experience, the Company believes the initial contractual term is the best estimate for the period of earnings. If any installation costs exceed the amount of corresponding deferred revenue, the excess cost is recognized in the current period.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.Depreciation on these assets is computed on a straight-line basis over the estimated useful lives of the assets. Assets are recorded at acquired cost plus anycost. Costs associated with the initial customer installations and upgrade of services and acquiring and deploying customer premise equipment, including materials, internal labor to preparecosts, and related indirect labor costs are also capitalized. Indirect and overhead costs include payroll taxes, insurance, and other benefits. Capitalized labor costs include the assetdirect costs of engineers and service delivery technicians involved in the installation and upgrades of services, and the costs of support personnel directly involved in capitalizable activities, such as project managers and supervisors. Internal labor costs are based on standards developed by position for installation to become functional.the percentage of time spent on capitalizable projects while overhead costs are capitalized based on standards developed from historical information. Costs for repairs and maintenance, disconnecting service, or reconnecting service are expensed as incurred. The Company capitalized labor costs, including indirect and overhead costs, of $4.3 million and $3.0 million for the three months ended June 30, 2019 and 2018, respectively, and $8.5 million and $6.2 million for the six months ended June 30, 2019 and 2018, respectively. Assets and liabilities under capitalfinance leases are recorded at the lesser of the present value of the aggregate future minimum lease payments or the fair value of the assets under lease. Leasehold improvements and assets under capitalfinance leases are amortized over the shorter of the term of the lease, excluding optional extensions, or the useful life. Expenditures for maintenance and repairs are expensed as incurred. Depreciable lives used by the Company for its classes of assets are as follows:
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| |
Freehold Land and Buildingsbuildings | 30 years |
Furniture and Fixturesfixtures | 7 years |
Fiber Optic Cableoptic cable | 20 years |
Duct | 40 years |
Fiber Optic Network Equipmentoptic network equipment | 53 - 15 years |
Leasehold Improvementsimprovements | up to 10 years |
Computer Hardwarehardware and Softwaresoftware | 3-5 years |
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of an asset were to exceed its estimated future undiscounted cash flows, the asset would be considered to be impaired. Impairment losses would then be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of, if any, are reported at the lower of the carrying amount or fair value less costs to sell.
Software Capitalization
Software development costs include costs to develop software programs to be used solely to meet the Company's internal needs. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a function it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. The Company capitalized software costs
of $0.4$1.1 million and $0.4$1.3 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $1.2$2.2 million and $1.2$2.1 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least annually, in October, or more frequently if a triggering event occurs between impairment
testing dates. The Company operates as a single operating segment and as a single reporting unit for the purpose of evaluating goodwill impairment. The Company's impairment assessment begins with a qualitative assessment to determine whether it is more like than not that fair value of the reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the Company against the planned results used in the last quantitative goodwill impairment test. Additionally, the Company's fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative impairment test is performed. Under the quantitative impairment test, the estimated fair value of the reporting unit would be compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value then no impairment exists. If the estimated fair value of the reporting unit is less than its carrying value, an impairment loss would be recognized for the excess of the carrying value of the reporting unit over the fair value, not to exceed the carrying amount of goodwill.
Fair value of the Company under the quantitative impairment test is determined using a combination of both income and market-based approaches, weighted 40% and 60%, respectively. The assumptions which have the most significant effect on fair value derived using the income approach are (1) revenue growth rates, (2) the discount rate, (3) terminal growth rates, and (4) foreign currency rates. The assumptions used in the market approach include (1) the stock price of the Company and (2) the selection of comparable companies. The Company did identify a triggering event during the three months ended June 30, 2019 due to the significant decline in its stock price. Accordingly, the Company performed an assessment of fair value using policy outlined above. There were no triggering events or goodwill impairments identified for the ninesix months ended SeptemberJune 30, 2017.2018.
Based upon the results of its fair value analysis, the Company’s estimated fair value exceeded its carrying value by approximately 21%. Management considers the assumptions used in its analysis to be its best estimates across a range of possible outcomes based on available evidence at the time of the assessment. While the Company concluded no impairment at this time, the Company’s goodwill is at risk of future impairment in the event of significant unexpected changes in the Company’s forecasted future results and cash flows, or if there is a negative change in the long-term outlook for the business or in other factors such as the discount rate, or if there is a further decline in the stock price.
Intangible assets arising from business combinations, such as acquired customer contracts and relationships (collectively "customer relationships"), trade names, and/or intellectual property, or know-how, are initially recorded at fair value. The Company amortizes these intangible assets over the determined useful life which generally ranges from three3 to eight20 years. The Company reviews its intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. There were no triggering events or intangible asset impairments recognized for the ninesix months ended SeptemberJune 30, 2017.2019 and 2018.
Business Combinations
The Company includes the results of operations of the businesses that it acquires commencing on the respective dates of acquisition. The Company allocates the fair value of the purchase price of its acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Asset Purchases
Periodically the Company acquires customer contracts that it accounts for as an asset purchase and records a corresponding intangible asset that is amortized over its estimated useful life. No goodwill is recorded in an asset purchase. During the nine months ended September 30, 2017, the Company acquired customer contracts for an aggregate purchase price of $37.3 million, of which $14.9 million was paid during the nine months ended September 30, 2017 at the acquisitions' respective closing dates. Of the remaining $22.4 million, $2.9 million was paid during the nine months ended September 30, 2017 and the remaining $19.5 million is expected to be paid in the remainder of 2017 and 2018, subject to any indemnification claims made through the final payment date. During 2016, the Company acquired customer contracts for an aggregate purchase price of $41.3 million, of which $20.0 million was paid in 2016 at the respective closing dates, and $6.0 million was paid during the nine months ended September 30, 2016. Of the remaining $21.3 million, $18.0 million was paid during the nine months ended September 30, 2017 and the remaining $3.3 million is expected to be paid in the remainder of 2017, subject to any indemnification claims made through the final payment dates.
Accrued Supplier Expenses
The Company accrues estimated charges owed to its suppliers for services. The Company bases this accrual on the supplier contract, the individual service order executed with the supplier for that service, and the length of time the service has been active.
Disputed Supplier Expenses
In the normal course of business, the Company identifies errors by suppliers with respect to the billing of services. The Company performs bill verification procedures to ensure that errors in the Company's suppliers' billed invoices are identified and resolved. If the Company concludes that a vendor has billed inaccurately, the Company will record a liability only for the amount that it believes is owed. As of SeptemberJune 30, 2017,2019 and December 31, 2018, the Company had open disputes not accrued for of $4.2 million. As of December 31, 2016, the Company had open disputes not accrued for of $5.8 million.$11.8 million and $9.1 million, respectively.
Acquisition Earn-outs and Holdbacks
Acquisition earn-outs and holdbacks represent either contingent consideration subject to re-measurement to fair value, or fixed deferred consideration to be paid out at some point in the future, typically on the one-year anniversary of an acquisition. Contingent consideration is remeasured to fair value at each reporting period.acquisition or asset purchase. The portion of the deferred consideration due within one year is recorded as a current liability until paid, and any consideration due beyond one year is recorded in other long-term liabilities.
The Company had no acquisition holdbacks as of June 30, 2019. As of September 30, 2017 and December 31, 2016, there was no contingent consideration subject to re-measurement outstanding.2018, acquisition holdbacks were included within Accrued expenses and other current liabilities within the condensed consolidated balance sheets.
Debt Issuance Costs
Debt issuance costs represent costs that qualify for deferral associated with the issuance of new debt or the modification of existing debt facilities. The unamortized balance of debt issuance costs is presented as a reduction to the carrying value of long-term debt. Debt issuance costs are amortized and recognized on the condensed consolidated statements of operations as interest expense. The unamortized debt issuance costs were $30.8$29.5 million and $9.3$31.6 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.
Original Issuance Discounts and Premiums
Original issuance discounts and premiums ("OID") is the difference between the face value of debt and the amount of principal received when the loandebt was originated. When the debt reaches maturity, the face value of the debt is payable. The Company recognizes OIDoriginal issuance discounts and premiums by accretion of the discount or premium as interest expense, net over the term of the debt. The unamortized portion of the OIDoriginal issuance discounts and premiums was a $1.9$44.3 million net premiumdiscount and a $7.0$47.8 million net discount as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.
Translation of Foreign Currencies
For non-U.S. subsidiaries, the functional currency is evaluated at the time of the Company's acquisition of such subsidiaries and on a periodic basis for financial reporting purposes. These condensed consolidated financial statements have been reported in U.S. Dollars by translating asset and liability amounts of foreign subsidiaries at the closing currency exchange rate, equity amounts at historical rates, and the results of operations and cash flow at the average currency exchange rate prevailing during the periods reported. The net effect of such translation gains and losses are reflected in accumulated other comprehensive loss in the stockholders' equity section of the condensed consolidated balance sheets.
Transactions denominated in foreign currencies other than a subsidiary's functional currency are recorded at the rates of exchange prevailing at the time of the transaction. Monetary assets and liabilities denominated in foreign currencies are translatedremeasured at the rate of exchange prevailing at the balance sheet date. Exchange differences arising upon settlement of a transaction are reported in the condensed consolidated statements of operations in other expense, net.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency or interest rate risk on expected future cash flows. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates. The Company does not hold derivatives for trading purposes.
As of June 30, 2019 and December 31, 2018, the Company had derivative financial instruments in the form of interest rate swaps outstanding. The interest rate swaps were not designated as hedges and therefore do not qualify for hedge accounting. Refer to Note 7 - Debt for further information.
Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings on the condensed consolidated statement of operations as other expense, net. The Company recognized a loss of $19.9 million and $98.1 million during the three months ended June 30, 2019 and 2018, respectively, and $35.2 million and $115.3 million during the six months ended June 30, 2019 and 2018, respectively due to the change in fair value of its derivative financial instruments.
The Company records the fair value of its derivative financial instruments in the condensed consolidated balance sheet as a component of other current assets when in a net asset position and a component of accrued expenses and other current liabilities when in a net liability position.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The Company classifies certain assets and liabilities based on the following hierarchy of fair value:
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Level 1: | Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date. |
| |
Level 2: | Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| |
Level 3: | Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument's valuation. |
When determining the fair value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which it would transact and considers risks, restrictions, or other assumptions that market participants would use when pricing the asset or liability.
AsRecurring Fair Value Measurements
In accordance with GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. For the Company, the only assets or liabilities adjusted to fair value on a recurring basis are its derivative financial instruments.
The Company measures all derivatives at fair value and recognizes them as either assets or liabilities in its condensed consolidated balance sheets. The Company's derivative financial instruments are valued primarily using models based on readily observable market parameters for all substantial terms of Septemberour derivative contracts, and therefore have been classified as Level 2. None of the Company's derivative financial instruments qualify for hedge accounting, and therefore all changes in the fair values of derivative instruments are recognized in earnings in the current period.
The following table presents the Company's financial assets and liabilities that are required to be measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of June 30, 20172019 and December 31, 2016,2018 (in millions). There were no transfers between Level 1 and Level 2 during the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cashthree and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities, and acquisition earn-outs and holdbacks approximated fair value due to the short-term nature of these instruments.six months ended June 30, 2019 or 2018.
The table below presents the fair values for the Company's long-term debt as well as the input level used to determine these fair values as of September 30, 2017 and December 31, 2016. The carrying amounts exclude any debt issuance costs or original issuance discount:
|
| | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurement Using |
| | Total Carrying Value in Consolidated Balance Sheet | | Unadjusted Quoted Prices in Active Markets for Identical Assets or Liabilities (1) (Level 1) |
(amounts in thousands) | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
Liabilities not recorded at fair value in the Financial Statements: | | | | | | | | |
Long-term debt, including the current portion: | | | | | | | | |
Term loan | | $ | 694,750 |
| | $ | 425,775 |
| | $ | 699,440 |
| | $ | 425,775 |
|
Senior notes | | 450,000 |
| | 300,000 |
| | 478,125 |
| | 300,000 |
|
Total long-term debt, including current portion | | $ | 1,144,750 |
| | $ | 725,775 |
| | $ | 1,177,565 |
| | $ | 725,775 |
|
|
| | | | | | | | | | | | | | | |
| June 30, 2019 |
| | | Quoted Prices in Active Markets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Interest rate swap agreements | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | |
Liabilities: | | | | | | | |
Interest rate swap agreements | $ | (57.5 | ) | | $ | — |
| | $ | (57.5 | ) | | $ | — |
|
(1)
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| | | Quoted Prices in Active Markets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Interest rate swap agreements | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | |
Liabilities: | | | | | | | |
Interest rate swap agreements | $ | (22.4 | ) | | $ | — |
| | $ | (22.4 | ) | | $ | — |
|
Non-recurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value based on a recurring basis, the bid quoted price.Company records assets and liabilities at fair value on a non-recurring basis as required by GAAP.
Assets measured at fair value on a non-recurring basis include goodwill, tangible assets, and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).
Other Fair Value Measurements
As of June 30, 2019 and December 31, 2018, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximated fair value due to the short-term nature of these instruments.
The table below presents the fair values for the Company's long-term debt as well as the input level used to determine these fair values as of June 30, 2019 and December 31, 2018. The carrying amounts exclude any debt issuance costs or original issuance discount:
|
| | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurement Using |
| | Total Carrying Value in Condensed Consolidated Balance Sheet | | Unadjusted Quoted Prices in Active Markets for Identical Assets or Liabilities (1) (Level 1) |
(amounts in millions) | | June 30, 2019 | | December 31, 2018 | | June 30, 2019 | | December 31, 2018 |
Liabilities not recorded at fair value in the Financial Statements: | | | | | | | | |
Long-term debt, including the current portion: | | | | | | | | |
US Term loan | | $ | 1,752.3 |
| | $ | 1,761.2 |
| | $ | 1,585.8 |
| | $ | 1,648.9 |
|
EMEA Term loan | | 843.5 |
| | 857.6 |
| | 792.9 |
| | 827.5 |
|
7.875% Senior unsecured notes | | 575.0 |
| | 575.0 |
| | 465.8 |
| | 488.8 |
|
Revolving line of credit | | 85.0 |
| | 59.0 |
| | 85.0 |
| | 59.0 |
|
Other secured loans | | 10.1 |
| | 18.1 |
| | 10.1 |
| | 18.1 |
|
Total long-term debt, including current portion | | $ | 3,265.9 |
| | $ | 3,270.9 |
| | $ | 2,939.6 |
| | $ | 3,042.3 |
|
(1) Fair value based on the bid quoted price, except for the revolving credit facility and other secured loans for which carrying value approximates fair value.
Concentrations of Credit Risk
Financial instruments potentially subject to concentration of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. At times during the periods presented, the Company had funds in excess of $250,000 insured by the U.S. Federal Deposit Insurance Corporation, or in excess of similar Deposit Insurance programs outside of the United States, on deposit at various financial institutions. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
The Company's trade accounts receivable are generally unsecured and geographically dispersed. No single customer's trade accounts receivable balance as of SeptemberJune 30, 20172019 or December 31, 20162018 exceeded 10% of the Company's consolidated accounts receivable, net. No single customer accounted for more than 10%5% of revenue for the ninethree or six months ended SeptemberJune 30, 2017 and 2016.2019 or 2018.
Newly Adopted Accounting Principles
In MarchFebruary 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to improve2016-02, "Leases (ASC 842)." ASC 842, including all the accounting for share-based payment transactions. The ASU changes five aspects of the accounting for share-based payment award transactions: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for taxes. The Company adopted ASU 2016-09 effective January 1, 2017. Excess tax benefits for share-based payments are now recognized against income tax expense rather than additional paid-in capital and are included in operating cash flows rather than financing cash flows. The recognition of excess tax benefits has been applied on a modified retrospective basis through a cumulative-effect adjustment to the opening balance of retained earnings. As of January 1, 2017, the cumulative effect of adopting ASU 2016-09 was an increase in deferred tax assets of $11.2 million and a decrease in accumulated deficit of $11.2 million as a result of recognizing $27.8 million previously unrecognized excess tax benefits from share-based compensation. The Company will continue to account for forfeitures as they occur. Cash paid by by the Company when directly withholding shares for tax withholding purposes will continue to be classified as a financing activity rather than an operating activity. Additionally, the Company has applied the provisions of ASU 2016-09 on a prospective basis in the condensed consolidated statements of cash flows and prior periods have not been adjusted.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts
with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new revenue recognition standard will be effective for the Company in the first quarter of 2018, with the option to early adopt it in the first quarter of 2017. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company will adopt this new standard as of January 1, 2018 and currently expects to apply the modified retrospective method, which will require a cumulative effect adjustment as of the date of adoption. The Company has completed its initial assessment of the effect of adoption and is in the process of completing the assessment to quantify the impact to the Company’s results of operations, financial position, and cash flows. Based on this initial assessment, the Company does not expect the standard to materially impact the amount and timing of revenue recognition. The new standard will require certain costs, primarily internal sales commissions, to be deferred rather than expensed, as they are currently. The new standard will also require additional disclosures for the estimate of variable consideration to be included in the transaction price for certain of our usage based contracts and contracts with price concessions. Additional disclosures will also be required regarding the judgments and changes in judgments for these estimates of the assets to be recognized from costs incurred to obtain or fulfill a contract and variable consideration. Both the Company’s initial impact assessment and its selected transition method may change depending on the results of the Company’s final assessment of the impactrelated amendments subsequent to its financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, whichissuance, requires most leases (with the exception of leases with terms of less than one year) to be recognized on the balance sheet as an asset and a lease liability. Leases will be classifiedThe Company adopted ASC 842 as an operating lease or a financing lease. Operating leases are expensed usingof January 1, 2019 and applied the straight-lineoptional transition relief method whereas financing leases will be treated similarly to a capital lease underavailable in the current standard. The new standard will be effective for annual and interimCompany has continued to apply ASC 840, including its disclosure requirements, to the comparative periods within those fiscal years, beginning after December 15, 2018, but early adoption is permitted. The new standard must be presented using the modified retrospective method beginning with the earliest comparative period presented.
The Company is currently evaluatingelected the effectpackage of practical expedients available in the standard, and so did not reassess the classification of existing leases or any initial direct costs associated with those leases. The Company did not utilize the hindsight practical expedient in its adoption of the new standardstandard. The Company has made an accounting policy election not to recognize right of use assets and lease liabilities for leases with a lease term of 12 months or less. Instead, lease payments for these leases are recognized as lease cost on its condensed consolidated financial statementsa straight-line basis over the lease term.
Upon adoption, the Company recognized right of use assets and related disclosures.
In August 2016,lease liabilities for operating leases, where we are the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice of how certain transactions are classified and presentedlessee, in the statementamount of cash flows in accordance with ASC 230.$437.6 million and $434.6 million, respectively. The ASU amends or clarifies guidance on eight specific cash flow issues, someright of use assets included adjustments for prepayments, deferred rent, and above/below market lease intangibles. The adoption of this standard did not impact opening retained earnings. There was no material impact upon adoption to the accounting for leases for which include classification on debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the effect of the new standard on its condensed consolidated financial statements and related disclosures, but the Company does not expect the new guidance to have a material impact.lessor.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact on its condensed consolidated financial statements.
In March 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill (Step 2) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (as determined in Step 1). The guidance is effective prospectively for public business entities for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expectelected to early adopt the standard effective June 30, 2019. Any future goodwill impairment, should it occur, will be determined in accordance with this ASU.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, whichallows for reclassification of stranded tax effects on items resulting from the Tax Act from accumulated other comprehensive income (loss) to retained earnings. The guidance is effective for the Company for interim and annual reporting periods beginning after December 31, 2018. The Company adopted the guidance as of January 1, 2019, and the provisions of the new guidance todid not have a material impact on its condensed consolidated financial statements.
In May 2017,August 2018, the SEC issued several final rules, including but not limited to SEC Final Rule Release No. 33-10532 Disclosure Update and Simplification (“Final Rule”), which amends certain redundant, duplicative, outdated, superseded or overlapping disclosure requirements. This Final Rule is intended to facilitate disclosure information provided to investors and simplify compliance without significantly impacting the mix of information provided to investors. The amendments also expand the disclosure requirements regarding the analysis of stockholders' equity for interim financial statements, in which entities will be required to present a reconciliation for each period for which a statement of comprehensive income is required to be filed. The Final Rule was effective on November 5, 2018, however, the SEC staff announced that it would not object if the filer's first presentation of the changes in stockholders' equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company used the new presentation of a condensed consolidated statement of stockholders' equity within its interim financial statements beginning in its Form 10-Q for the quarter ended March 31, 2019.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2017-09, Compensation2016-13, Financial Instruments - Stock CompensationCredit Losses (Topic 718)326): ScopeMeasurement of Modification AccountingCredit Losses on Financial Instruments, which clarifies when changesand subsequent amendment to the terms or conditionsinitial guidance, ASU 2018-19, in November 2018. The updated guidance introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of share-based equity awards must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award are not the same immediately before and after the modification.financial instruments, including trade receivables. The updated guidance is to be applied using a modified retrospective transition approach and is effective prospectively for public business entities
for fiscal yearsannual and interim reporting periods beginning after December 15, 2017, including2021, and early adoption is permitted. The Company is currently assessing the impact the updated guidance will have on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The guidance will be effective for the Company interim and annual reporting periods within that reporting period.beginning after December 15, 2019, and early adoption permitted. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company does not expect this newanticipate the updated guidance towill have a material impact on its condensed consolidated financial statements.
Other recent accounting pronouncements issued by the FASB during 2019 and through the filing date did not and are not believed by management to have a material impact on the Company's present or historical consolidated financial statements.
NOTE 2 — BUSINESS ACQUISITIONS
Since its formation, the Company has consummated a number of transactions accounted for as business combinations as part of its growth strategy. The acquisitions of these businesses, which are in addition to periodic purchases of customer contracts, have allowed the Company to increase the scale at which it operates, which in turn affords the Company the ability to increase its operating leverage, extend its network, and broaden its customer base.
The accompanying condensed consolidated financial statements include the operations of the acquired entities from their respective acquisition dates. All of the acquisitions have been accounted for as a business combination. Accordingly, consideration paid by the Company to complete the acquisitions is initially allocated to the acquired assets and liabilities based upon their estimated acquisition date fair values. The recorded amounts for assets acquired and liabilities assumed are provisional and subject to change during the measurement period, which is up to 12 months from the acquisition date.
In January 2017,There were no acquisitions completed during the six months ended June 30, 2019. During the six months ended June 30, 2019, the Company acquired Hibernia. The Company paid $529.6$0.5 million inof additional cash consideration for Access Point, Inc. ("API"), which is included within Acquisitions of which $14.6 million wasbusiness, net of cash acquired and 3,329,872 unregistered shareswithin our condensed consolidated statement of the Company's common stock, initially valued at $75.0 million on the date of announcement, and ultimately valued at $86.1 million at closing. The results of Hibernia have been included from January 1, 2017.cash flows.
In June 2017, the Company acquired Perseus Telecom ("Perseus"). The Company paid $37.5 million in cash consideration and assumed $1.9 million in capital leases. $4.0 million of the initial cash consideration is held in escrow for one year, subject to reduction for any indemnification claims made by the Company prior to such date. The results of Perseus have been included from June 1, 2017.
In September 2017, the Company acquired Global Capacity. The Company paid $104.0 million in cash consideration, of which $4.0 million was net cash acquired, and 1,850,000 unregistered shares of the Company's common stock valued at $53.6 million at closing. $10.0 million of the initial cash consideration is held in escrow for one year, subject to reduction for any indemnification claims made by the Company prior to such date. The results of Global Capacity have been included from September 15, 2017.
The table below reflects the Company's provisional estimates of the acquisition date fair values of the assets acquired and liabilities assumed for its acquisitions over the nine months ended September 30, 2017 (amounts in thousands):
|
| | | | | | | | | | | |
Purchase Price | Hibernia | | Perseus | | Global Capacity |
Cash paid at closing, including working capital estimate | $ | 529,600 |
| | $ | 37,500 |
| | $ | 104,000 |
|
Common stock (1) | 86,092 |
| | — |
| | 53,649 |
|
Purchase consideration | $ | 615,692 |
| | $ | 37,500 |
| | $ | 157,649 |
|
| | | | | |
Purchase Price Allocation | | | | | |
Assets acquired: | | | | | |
Current assets | $ | 49,119 |
| | $ | 1,792 |
| | $ | 25,838 |
|
Property, plant and equipment | 432,911 |
| | 5,255 |
| | 30,451 |
|
Other assets | 359 |
| | — |
| | 1,554 |
|
Intangible assets - customer lists | 166,740 |
| | 13,840 |
| | 43,800 |
|
Intangible assets - tradename | 720 |
| | 40 |
| | 200 |
|
Intangible assets - other | — |
| | 140 |
| | 5,600 |
|
Goodwill | 196,057 |
| | 31,536 |
| | 84,640 |
|
Total assets acquired | 845,906 |
| | 52,603 |
| | 192,083 |
|
| | | | | |
Liabilities assumed: | | | | | |
Current liabilities | (40,749 | ) | | (11,301 | ) | | (17,911 | ) |
Capital leases, long-term portion | — |
| | (1,906 | ) | | — |
|
Deferred revenue | (163,300 | ) | | — |
| | (16,108 | ) |
Deferred tax liability | (26,165 | ) | | (1,708 | ) | | — |
|
Other long-term liabilities | — |
| | (188 | ) | | (415 | ) |
Total liabilities assumed | (230,214 | ) | | (15,103 | ) | | (34,434 | ) |
Net assets acquired | $ | 615,692 |
| | $ | 37,500 |
| | $ | 157,649 |
|
(1) Common stock fair value for Hibernia equals the closing share price of $27.80 less a discount for lack of marketability. Common stock fair value for Global Capacity equals the closing share price of $30.85 less a discount for lack of marketability.
Intangible assets acquired related to the Hibernia acquisition include customer relationships and the Hibernia tradename. Intangible assets related to customer relationships and tradename are subject to straight-line amortization. The customer relationships have a weighted-average useful life of 10 years and the tradenames have a useful life of 2 years.
Intangible assets acquired related to Perseus include customer relationships and are subject to straight-line amortization. The customer relationships have a weighted-average useful life of 8 years.
Intangible assets acquired related to Global Capacity include customer relationships and are subject to straight-line amortization. The customer relationships have a weighted average useful life of 8 years.
Amortization expense related to intangible assets created as a result of the Hibernia, Perseus, and Global Capacity acquisitions of $4.7 million and $13.8 million has been recorded for the three and nine months ended September 30, 2017, respectively. Estimated amortization expense related to these for each of the years subsequent to September 30, 2017 is as follows (amounts in thousands):
|
| | | |
2017 remaining | $ | 7,297 |
|
2018 | 27,595 |
|
2019 | 24,176 |
|
2020 | 24,176 |
|
2021 | 24,176 |
|
2022 and beyond | 109,843 |
|
Total | $ | 217,263 |
|
Goodwill in the amount of $196.1 million, $31.5 million, and $84.6 million was recorded as a result of the acquisitions of Hibernia, Perseus, and Global Capacity, respectively. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is not expected to be deductible for tax purposes. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present.
For material acquisitions completed during 2016, 2015,2018, 2017, and 2014, please2016, refer to Note 3 - Business Acquisitions to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2018. During the six months ended June 30, 2019, certain measurement period adjustments were recorded to adjust provisional amounts for acquisitions completed during 2018.
Acquisition Method Accounting Estimates
The Company initially recognizes the assets and liabilities acquired from the aforementioned acquisitions based on its preliminary estimates of their acquisition date fair values. As additional information becomes known concerning the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is no longer than a one year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.
Transaction Costs
Transaction costs describe the broad category of costs the Company incurs in connection with signed and/or closed acquisitions. There are two types of costs that the Company accounts for:
•Severance, restructuring and other exit costs
•Transaction and integration costs
Severance, restructuring and other exit costs include severance and other one-time benefits for terminated employees, termination charges for leases and supplier contracts, and other costs incurred associated with an exit activity. These costs are reported separately in the condensed consolidated statements of operations during the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. Refer to Note 910 - Severance, Restructuring, and Other Exit Costs of these condensed consolidated financial statements for further information on severance, restructuring, and other exit costs.information.
Transaction and integration costs include expenses associated with legal, accounting, regulatory, and other transition services rendered in connection with acquisition, travel expense, and other non-recurring direct expenses associated with acquisitions. Transaction and integration costs are expensed as incurred in support of the integration. The Company incurred transaction and integration costs of $3.4$5.7 million and $0.8$8.4 million during the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $13.8$14.9 million and $3.1$14.3 million during the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. Transaction and integration costs have been included in selling, general and administrative expenses in the condensed consolidated statements of operations and in cash flows from operating activities in the condensed consolidated statements of cash flows.
Pro forma Financial Information (Unaudited)
The pro forma results presented below include the effects of the Company'sCompany’s material acquisitions during 2016 and 20172018 as if the acquisitions had occurred on January 1, 2016.2018. The pro forma net income (loss)loss for the three and ninesix months ended SeptemberJune 30, 2017 and 2016, respectively,2018 includes adjustments to revenue and cost of telecommunicationtelecommunications services to eliminate inter-company activity, adjustments to deferred revenue and deferred cost from the acquired companies, and the elimination of certain taxes presented as revenue by the acquired companies.IFRS to US GAAP adjustments for Interoute. The pro forma adjustments are based on historically reported transactions by the acquired companies. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions. The unaudited pro forma financial information below is not necessarily indicative of either
future results of operations or results that might have been achieved had the acquisitions occurred onbeen consummated as of January 1, 2016.2018.
|
| | | | | | | |
| Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
(Amounts in millions, except per share and share data) | | | |
Revenue | $ | 461.3 |
| | $ | 932.5 |
|
Net loss | $ | (40.3 | ) | | $ | (60.5 | ) |
| | | |
Loss per share: | | | |
Basic | $ | (0.84 | ) | | $ | (1.30 | ) |
Diluted | $ | (0.84 | ) | | $ | (1.30 | ) |
| | | |
Denominator for basic EPS – weighted average shares | 48,221,341 |
| | 46,435,245 |
|
Denominator for diluted EPS – weighted average shares | 48,221,341 |
| | 46,435,245 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
(Amounts in thousands, except per share and share data) | | | | | | | |
Revenue | $ | 240,554 |
| | $ | 234,924 |
| | $ | 726,139 |
| | $ | 694,001 |
|
Net (loss) income | $ | (13,482 | ) | | $ | 4,716 |
| | $ | (35,017 | ) | | $ | 402 |
|
| | | | | | | |
(Loss) earnings per share: | | | | | | | |
Basic | $ | (0.32 | ) | | $ | 0.11 |
| | $ | (0.85 | ) | | $ | 0.01 |
|
Diluted | $ | (0.32 | ) | | $ | 0.11 |
| | $ | (0.85 | ) | | $ | 0.01 |
|
| | | | | | | |
Denominator for basic EPS – weighted average shares | 41,762,693 |
| | 42,331,935 |
| | 41,160,317 |
| | 42,178,479 |
|
Denominator for diluted EPS – weighted average shares | 41,762,693 |
| | 42,965,793 |
| | 41,160,317 |
| | 42,661,286 |
|
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
The goodwill balance was $593.1$1,773.4 million and $280.6$1,738.0 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. Additionally, the Company's intangible asset balance was $413.0$507.3 million and $193.9$552.4 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. The additions to both goodwill and intangible assets during the ninesix months ended SeptemberJune 30, 20172019 relate primarily to measurement period adjustments for the acquisitions of Hibernia, Perseus,Interoute and Global Capacity (refer to Note 2). The additions to intangible assets during the nine months ended September 30, 2017 also include the purchases of customer contracts.Access Point, Inc.
The change in the carrying amount of goodwill for the ninesix months ended SeptemberJune 30, 20172019 was as follows (amounts in thousands)millions):
|
| | | |
Goodwill - December 31, 2018 | $ | 1,738.0 |
|
Adjustments to prior year business combinations | 47.4 |
|
Foreign currency translation adjustments | (12.0 | ) |
Goodwill - June 30, 2019 | $ | 1,773.4 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Global Capacity | | Perseus | | Hibernia | | Prior Year Acquisitions | | Total |
Balance, December 31, 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | 280,593 |
| | $ | 280,593 |
|
Initial goodwill associated with current year business combinations | 84,640 |
| | 23,375 |
| | 186,538 |
| | — |
| | 294,553 |
|
Adjustments to current year business combinations | — |
| | 8,161 |
| | 9,519 |
| | — |
| | 17,680 |
|
Adjustments to prior year business combinations | — |
| | — |
| | — |
| | 280 |
| | 280 |
|
Balance, September 30, 2017 | $ | 84,640 |
| | $ | 31,536 |
| | $ | 196,057 |
| | $ | 280,873 |
| | $ | 593,106 |
|
The following table summarizes the Company’s intangible assets as of SeptemberJune 30, 20172019 and December 31, 20162018 (amounts in thousands)millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Amortization Period | | Gross Asset Cost | | Accumulated Amortization | | Net Book Value | | Gross Asset Cost | | Accumulated Amortization | | Net Book Value |
Customer lists | 3-20 years | | $ | 756.2 |
| | $ | 274.3 |
| | $ | 481.9 |
| | $ | 757.7 |
| | $ | 233.7 |
| | $ | 524.0 |
|
Non-compete agreements | 3-5 years | | 4.7 |
| | 4.6 |
| | 0.1 |
| | 4.7 |
| | 4.6 |
| | 0.1 |
|
Intellectual property | 10 years | | 38.5 |
| | 13.3 |
| | 25.2 |
| | 38.6 |
| | 11.3 |
| | 27.3 |
|
Tradename | 1-3 years | | 6.0 |
| | 5.9 |
| | 0.1 |
| | 6.0 |
| | 5.0 |
| | 1.0 |
|
| | | $ | 805.4 |
| | $ | 298.1 |
| | $ | 507.3 |
| | $ | 807.0 |
| | $ | 254.6 |
| | $ | 552.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| Amortization Period | | Gross Asset Cost | | Accumulated Amortization | | Net Book Value | | Gross Asset Cost | | Accumulated Amortization | | Net Book Value |
Customer contracts | 3-10 years | | $ | 529,810 |
| | $ | 137,735 |
| | $ | 392,075 |
| | $ | 267,755 |
| | $ | 91,136 |
| | $ | 176,619 |
|
Non-compete agreements | 3-5 years | | 4,571 |
| | 4,491 |
| | 80 |
| | 4,572 |
| | 4,420 |
| | 152 |
|
Point-to-point FCC license fees | 3 years | | 1,697 |
| | 1,697 |
| | — |
| | 1,695 |
| | 1,268 |
| | 427 |
|
Intellectual property | 10 years | | 4,052 |
| | 2,658 |
| | 1,394 |
| | 17,379 |
| | 2,076 |
| | 15,303 |
|
Trade name | 3 years | | 22,979 |
| | 3,564 |
| | 19,415 |
| | 3,092 |
| | 1,657 |
| | 1,435 |
|
| | | $ | 563,109 |
| | $ | 150,145 |
| | $ | 412,964 |
| | $ | 294,493 |
| | $ | 100,557 |
| | $ | 193,936 |
|
Amortization expense was $17.0$21.9 million and $10.1$21.0 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $49.6$44.0 million and $29.5$41.1 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.
Estimated amortization expense related to intangible assets subject to amortization at SeptemberJune 30, 20172019 in each of the years subsequent to SeptemberJune 30, 20172019 is as follows (amounts in thousands)millions):
|
| | | |
2017 remaining | $ | 19,429 |
|
2018 | 70,759 |
|
2019 | 62,485 |
|
2020 | 59,457 |
|
2021 | 57,912 |
|
2022 and beyond | 142,922 |
|
Total | $ | 412,964 |
|
|
| | | |
2019 remaining | $ | 41.6 |
|
2020 | 81.6 |
|
2021 | 80.0 |
|
2022 | 67.0 |
|
2023 | 54.5 |
|
2024 and beyond | 182.6 |
|
Total | $ | 507.3 |
|
NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table summarizes the Company’s prepaid expenses and other current assets as of June 30, 2019 and December 31, 2018 (amounts in millions):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Prepaid carrier costs | $ | 14.2 |
| | $ | 18.9 |
|
Prepaid selling, general and administrative | 11.8 |
| | 14.7 |
|
Short-term deposits | 0.1 |
| | 1.3 |
|
Taxes receivable | 2.8 |
| | 2.5 |
|
Deferred commissions | 6.6 |
| | 3.4 |
|
Other | 7.1 |
| | 8.4 |
|
| $ | 42.6 |
| | $ | 49.2 |
|
NOTE 5 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes the Company’s accrued expenses and other current liabilities as of SeptemberJune 30, 20172019 and December 31, 20162018 (amounts in thousands)millions):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Compensation and benefits | $ | 27.2 |
| | $ | 36.9 |
|
Carrier costs | 66.6 |
| | 101.1 |
|
Restructuring | 13.6 |
| | 25.8 |
|
Interest rate swaps | 57.5 |
| | 22.4 |
|
Interest | 23.7 |
| | 3.2 |
|
Acquisition holdbacks | — |
| | 6.7 |
|
Accrued taxes | 9.7 |
| | 2.8 |
|
Selling, general and administrative | 13.8 |
| | 8.3 |
|
Accrued capital expenditures | 1.5 |
| | 7.7 |
|
Other | 7.4 |
| | 11.9 |
|
| $ | 221.0 |
| | $ | 226.8 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Compensation and benefits | $ | 12,657 |
| | $ | 10,035 |
|
Selling, general and administrative | 5,861 |
| | 4,492 |
|
Carrier costs | 14,680 |
| | 13,543 |
|
Restructuring | 15,670 |
| | 3,247 |
|
Interest | 9,494 |
| | 657 |
|
Fiber pair repurchase | 20,000 |
| | — |
|
Customer pass-through taxes | 6,607 |
| | 3,213 |
|
Other | 7,920 |
| | 1,701 |
|
| $ | 92,889 |
| | $ | 36,888 |
|
NOTE 56 — DEFERRED REVENUE
The totalTotal deferred revenue as of SeptemberJune 30, 20172019 and December 31, 2018 was $173.7$356.9 million and $371.2 million, respectively, consisting of unamortized prepaid capacity sales,services, IRUs, and deferred non-recurring revenue, and unearned revenue for amounts billed in advance to customers.revenue. Deferred revenue is recognized as current and noncurrent deferred revenue on the condensed consolidated balance sheet.sheets.
Prepaid capacity sales and IRUs represent $126.7 million of the totalSignificant changes in deferred revenue balancebalances during the period are as of September 30, 2017 and remainingfollows (amounts in millions):
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Contract Term | | |
| Less than 1 Year | | Greater than 1 Year | | Total |
Balance, December 31, 2018 | $ | 28.7 |
| | $ | 342.5 |
| | $ | 371.2 |
|
Revenue recognized from beginning balance | (24.3 | ) | | (31.4 | ) | | (55.7 | ) |
Increase in deferred revenue (gross) | 107.1 |
| | 12.2 |
| | 119.3 |
|
Revenue recognized on increase in deferred revenue | (75.7 | ) | | (0.5 | ) | | (76.2 | ) |
Foreign currency translation adjustments | — |
| | (1.7 | ) | | (1.7 | ) |
Balance, June 30, 2019 | $ | 35.8 |
| | $ | 321.1 |
| | $ | 356.9 |
|
Remaining amortization at SeptemberJune 30, 20172019 and in each of the years subsequent to SeptemberJune 30, 20172019 is as follows (amounts in thousands)millions):
|
| | | | | | | | | | | |
| Contract Term | | |
| Less than 1 Year | | Greater than 1 Year | | Total |
2019 remaining | $ | 34.7 |
| | $ | 27.2 |
| | $ | 61.9 |
|
2020 | 1.1 |
| | 40.0 |
| | 41.1 |
|
2021 | — |
| | 36.7 |
| | 36.7 |
|
2022 | — |
| | 35.3 |
| | 35.3 |
|
2023 | — |
| | 33.6 |
| | 33.6 |
|
2024 and beyond | — |
| | 148.3 |
| | 148.3 |
|
| $ | 35.8 |
| | $ | 321.1 |
| | $ | 356.9 |
|
|
| | | |
| Capacity Sales and IRUs |
2017 remaining | $ | 5,430 |
|
2018 | 15,681 |
|
2019 | 11,249 |
|
2020 | 10,919 |
|
2021 | 10,049 |
|
2022 and beyond | 73,347 |
|
| $ | 126,675 |
|
NOTE 67 — DEBT
As of SeptemberJune 30, 20172019 and December 31, 2016,2018, long-term debt was as follows (amounts in thousands)millions):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| | | |
US Term loan | $ | 1,752.3 |
| | $ | 1,761.2 |
|
EMEA Term loan | 843.5 |
| | 857.6 |
|
7.875% Senior unsecured notes | 575.0 |
| | 575.0 |
|
Revolving line of credit | 85.0 |
| | 59.0 |
|
Other secured loans | 10.1 |
| | 18.1 |
|
Total debt obligations | 3,265.9 |
| | 3,270.9 |
|
Unamortized debt issuance costs | (29.5 | ) | | (31.6 | ) |
Unamortized original issuance discount, net | (44.3 | ) | | (47.8 | ) |
Carrying value of debt | 3,192.1 |
| | 3,191.5 |
|
Less current portion | (34.8 | ) | | (39.9 | ) |
Long-term debt less current portion | $ | 3,157.3 |
| | $ | 3,151.6 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| | | |
Term loan | $ | 694,750 |
| | $ | 425,775 |
|
7.875% Senior unsecured notes | 450,000 |
| | 300,000 |
|
Revolving line of credit | — |
| | 20,000 |
|
Total debt obligations | 1,144,750 |
| | 745,775 |
|
Unamortized debt issuance costs | (30,806 | ) | | (9,310 | ) |
Unamortized original issuance premium (discount), net | 1,941 |
| | (6,957 | ) |
Carrying value of debt | 1,115,885 |
| | 729,508 |
|
Less current portion | (7,000 | ) | | (4,300 | ) |
Long-term debt less current portion | $ | 1,108,885 |
| | $ | 725,208 |
|
20172018 Credit Agreement
On January 9, 2017,May 31, 2018, the Company entered into a credit agreement (the "2017"2018 Credit Agreement") that provides for (1) a $700.0$1,770.0 million term loan B facility (the "US Term Loan Facility"), (2) a €750.0 million term loan B facility (the "EMEA Term Loan Facility"), and (3) a $75.0$200.0 million revolving linecredit facility (the "Revolving Line of credit facilityCredit Facility") (which includes a $25.0$50.0 million letter of credit facility). In addition, the Company may request incremental term loan and/or incremental revolving loan commitments in an aggregate amount not to exceed the sum of $150.0 million and an unlimited amount that is subject to pro forma compliance with certain net secured leverage ratio tests provided, however, that incremental revolving loan commitments may not exceed $25.0 million. The term loan facilityUS Term Loan Facility was issued at an original issuance discount of $3.5$8.9 million and the EMEA Term Loan Facility was issued at an original issuance discount of €3.8 million.
The maturity date of the term loan facilityUS Term Loan Facility and the EMEA Term Loan Facility (collectively the "Term Loan Facilities") is January 9, 2024May 31, 2025 and the maturity date of the revolving lineRevolving Line of credit facilityCredit Facility is January 9, 2022. May 31, 2023. Each maturity date may be extended per the terms of the 2018 Credit Agreement.
The principal amountamounts of the term loan facility isUS Term Loan Facility and EMEA Term Loan Facility are payable in equal quarterly installments of $1.8$4.425 million and €1.875 million, respectively, commencing on March 31, 2017September 30, 2018 and continuing thereafter until the maturity date when the remaining balancebalances of outstanding principal amount is payable in full. In addition to scheduled mandatory repayments, the Company is also required to repay an amount of up to 50% of Excess Cash Flow (as defined in the Credit Agreement). No such excess cash payments were made during the nine months ended September 30, 2017.
The Company may prepay loans under the 20172018 Credit Agreement at any time, subject to certain notice requirements, and LIBOR breakage costs.costs, and prepayment fees noted above.
At the Company'sCompany’s election, the loans under the 2017 Credit AgreementUS Term Loan Facility may be made as either Base Rate Loans or EurodollarEurocurrency Loans. The Eurodollar Loans are subject to a floor of 1.00%.
On July 10, 2017,EMEA Term Loan Facility will bear interest at the Company entered into Amendment No. 1 (the "Repricing Amendment") to the 2017 Credit Agreement. The Repricing Amendment, among other things, reducedEuropean Money Markets Institute EURIBOR plus the applicable margin. The applicable margin on Tranche Bfor the US Term Loans from 3.00% to 2.25%Loan Facility is 1.75% for Base Rate Loans and from 4.00%2.75% for Eurocurrency Loans, subject to 3.25% for Eurodollar Loans, and reduced thea “LIBOR floor” of 0.00%. The applicable margin onfor the EMEA Term Loan Facility is 3.25%, subject to a “EURIBOR floor” of 0.00%. The applicable margin for revolving loans from
2.50% to 2.00%under the Revolving Line of Credit Facility is 1.75% for Base Rate Loans, 2.75% for Eurocurrency Loans denominated in U.S. Dollars and certain other approved currencies other than Euros, and 3.25% for revolving loans denominated in Euros.
The proceeds from 3.50%the US Term Loan Facility and EMEA Term Loan Facility were used to 3.00% for Eurodollar Loans. The amendment also established a soft call protection of 1.0% through January 10, 2018 for certain prepayments, refinancings, and amendments.
The effective interest rates onfinance the Interoute acquisition, to repay amounts outstanding under the Company's prior term loan facility, and to pay costs associated with such transactions.
On June 5, 2019, the Company entered into an Incremental Revolving Credit Assumption Agreement ("Incremental Agreement") to the 2018 Credit Agreement. The Incremental Agreement establishes $50.0 million in new revolving credit commitments, bringing the total sum of revolving credit commitments under the 2018 Credit Agreement, as modified by the Incremental Agreement, to $250.0 million. The revolving credit commitments made pursuant to the Incremental Agreement have terms and conditions identical to the existing revolving credit commitments under the 2018 Credit Agreement.
The unused and available amount of the Revolving Line of Credit Facility at SeptemberJune 30, 2017 and December 31, 20162019 was 4.6% and 5.8%, respectively.as follows (amounts in millions):
|
| | | |
Committed capacity | $ | 250.0 |
|
Borrowings outstanding | (85.0 | ) |
Letters of credit issued | (10.9 | ) |
Unused and available | $ | 154.1 |
|
The obligations of the Company under the 20172018 Credit Agreement are secured by the substantial majority of the tangible and intangible assets of the Company and the guarantors.Company.
The 20172018 Credit Agreement does not contain a financial covenant for the term loan facility,US Term Loan Facility or the EMEA Term Loan Facility, but includesit does include a maximum consolidated net secured leverage ratioConsolidated Net Secured Leverage Ratio applicable to the revolving credit facilityRevolving Line of Credit Facility in the event that utilization exceeds 30% of the revolving loan facility commitment.
The unused and available amount of the revolving line of credit facility at September 30, 2017 was as follows:
|
| | | |
Committed capacity | $ | 75,000 |
|
Borrowings outstanding | — |
|
Letters of credit issued | (3,296 | ) |
Unused and available | $ | 71,704 |
|
On October 12, 2017,August 8, 2019, the Company entered into Amendment No. 1 to the 2018 Credit Agreement, which amends the Consolidated Net Secured Leverage Ratio applicable to the Revolving Line of Credit Facility for each fiscal quarter ending September 30, 2019 through December 31, 2020. If triggered, the covenant, as amended, requires the Company to maintain a Consolidated Net Secured Leverage Ratio, on a Pro Forma Basis, below the maximum ratio specified as follows:
|
| | |
Fiscal Quarter Ending | | Maximum Ratio |
June 30, 2019 | | 6.50:1 |
September 30, 2019 | | 6.50:1 |
December 31, 2019 | | 6.50:1 |
March 31, 2020 | | 6.50:1 |
June 30, 2020 | | 6.50:1 |
September 30, 2020 | | 6.25:1 |
December 31, 2020 | | 6.25:1 |
March 31, 2021 | | 5.50:1 |
June 30, 2021 | | 5.00:1 |
September 30, 2021 | | 5.00:1 |
December 31, 2021 | | 4.50:1 |
March 31, 2022 | | 4.50:1 |
June 30, 2022 and thereafter | | 4.25:1 |
As of June 30, 2019, the Company's Consolidated Net Secured Leverage Ratio, as defined in the 2018 Credit Agreement, was approximately 5.2:1, which is below the maximum permitted ratio of 6.50:1.
In addition, Amendment No. 1 to the 2018 Credit Agreement added the certain restrictions, which remain in place from the effective date of the Amendment No. 1 until the delivery of the compliance certificate for the quarter ending March 31, 2021, demonstrating compliance with the Consolidated Net Secured Leverage Ratio for that quarter, including without limitation the following: the Company and its restricted subsidiaries (as defined in the 2018 Credit Agreement) may not make certain dividends, distributions and other restricted payments (as defined in the 2018 Credit Agreement), including that the Company may not pay dividends; the Company and its restricted subsidiaries may not designate any subsidiary an Incremental Revolving“Unrestricted Subsidiary” (which would effectively remove such subsidiary from the restrictions of the 2018 Credit Assumption Agreement to increaseAgreement); the Company and its restricted subsidiaries may not make “permitted acquisitions” (as defined in the 2018 Credit Agreement) or certain other investments, unless the Company and its restricted subsidiaries have liquidity (i.e., unrestricted cash and cash equivalents and availability under the revolving line of credit facility from $75.0under the 2018 Credit Agreement) of at least $250 million (other than the acquisition of KPN Eurorings B.V., a private limited liability company (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands with respect to $100.0 million.which this liquidity requirement is not applicable); and the amount of incremental borrowings under the 2018 Credit Agreement that the Company and its subsidiaries may request when the Consolidated Net Secured Leverage Ratio is above 4.40 to 1.00 the Company and its subsidiaries was reduced to $300 million minus amounts previously requested (which amount is $50 million requested under the Incremental Agreement described above).
Interest Rate Swaps
In April and May 2018, the Company entered into the following interest rate swap arrangements to partially mitigate the variability of cash flows due to changes in the Eurodollar rate, specifically related to interest payments on our term loans under the 2018 Credit Agreement:
|
| | | | | | | | | | | | | | | |
Trade date | April 6, 2018 |
| | May 17, 2018 |
| | May 17, 2018 |
| | May 17, 2018 |
|
Notional amount (in millions) | $ | 500.0 |
| | $ | 200.0 |
| | $ | 300.0 |
| | € | 317.0 |
|
Term (years) | 5 |
| | 7 |
| | 3 |
| | 7 |
|
Effective date | 4/30/2018 |
| | 6/29/2018 |
| | 6/29/2018 |
| | 6/29/2018 |
|
Termination date | 4/30/2023 |
| | 5/31/2025 |
| | 6/30/2021 |
| | 5/31/2025 |
|
Fixed rate | 2.6430 | % | | 3.0370 | % | | 2.8235 | % | | 0.8900 | % |
Floating rate | 1-month LIBOR |
| | 1-month LIBOR |
| | 1-month LIBOR |
| | 1-month EURIBOR |
|
The interest rate swaps do not qualify for hedge accounting.
The fair value of the interest rate swaps at June 30, 2019 and December 31, 2018 was as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value |
| | | | | June 30, 2019 | | December 31, 2018 |
Derivative Instrument | Aggregate Notional Amount | Effective Date | Maturity Date | | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
Interest rate swap | $ | 500.0 |
| 4/30/2018 | 4/30/2023 | | $ | — |
| | $ | (19.6 | ) | | $ | — |
| | $ | (4.4 | ) |
Interest rate swap | $ | 200.0 |
| 6/29/2018 | 5/31/2025 | | — |
| | (15.7 | ) | | — |
| | (6.9 | ) |
Interest rate swap | $ | 300.0 |
| 6/29/2018 | 6/30/2021 | | — |
| | (7.0 | ) | | — |
| | (2.8 | ) |
Interest rate swap | € | 317.0 |
| 6/29/2018 | 5/31/2025 | | — |
| | (15.2 | ) | | — |
| | (8.3 | ) |
| | | | | $ | — |
| | $ | (57.5 | ) | | $ | — |
| | $ | (22.4 | ) |
The Company records the fair value of interest rate swaps in its condensed consolidated balance sheets within prepaid expenses and other current assets when in an asset position and within accrued expenses and other current liabilities when in a liability position. The Company recognized a loss due to the change in fair value of its interest rate swaps in other expense, net of $19.9 million and $9.3 million for the three months ended June 30, 2019 and 2018, respectively, and $35.2 million and $9.3 million for the six months ended June 30, 2019 and 2018, respectively.
7.875% Senior Unsecured Notes
In DecemberDuring 2016 and 2017, the Company completed athree private offering of $300.0offerings for $575.0 million aggregate principal amount of its 7.875% senior unsecured notes due in 2024 (the "Original Notes"(collectively the “7.875% Senior Unsecured Notes”). The proceeds from the Original Notes were deposited into escrow, where the funds remained until the closing of the acquisition of Hibernia in January 2017. The Company recognized the proceeds from the privateEach offering as restricted cash and cash equivalents in its consolidated financial statements as of December 31, 2016. The funds were subsequently released with the closing of Hibernia. In connection with the offering, the Company incurred debt issuance costs of $9.7 million, of which $0.5 million was incurred in 2016 and the remainder was incurred in 2017.
In June 2017, the Company completed a private offering of $150.0 million aggregate principal amount of its 7.875% senior unsecured notes due in 2024 (the "June 2017 Notes"). The June 2017 Notes will be treated as a single series of debt securities with the Company's Original Notes (together with the June 2017 Notes, the "Existing Notes").securities. The June 20177.875% Senior Unsecured Notes have identical terms as the Original Notes, other than the issueissuance date and offering price. The June 20177.875% Senior Unsecured Notes were issued at a combined premium of $9.0$16.5 million.
Other Secured Loans
In connection with the offering,Interoute acquisition in May 2018, the Company incurredacquired other loans secured by certain network assets. The balance of other secured loans at June 30, 2019 and December 31, 2018 was $10.1 million and $18.1 million, respectively.
Effective Interest Rate
The effective interest rate on the long-term debt issuance costsat June 30, 2019 and December 31, 2018 was 5.4% and 5.3%, respectively. The effective interest rate considers the impact of $2.9 million.the interest rate swaps.
On October 10, 2017, the Company completed a private offering of $125.0 million aggregate principal amount of its 7.875% senior unsecured notes due in 2024 (the "October 2017 Notes"). The October 2017 Notes will be treated as a single series of debt securities with the Existing Notes. The October 2017 Notes have identical terms as the Existing Notes, other than the issue date and offering price. The October 2017 Notes were issued at a premium of $7.5 million. In connection with the offering, the Company incurred debt issuance costs of $2.0 million.
Term Loan and 7.875% Senior Unsecured NotesLong-term Debt Contractual Maturities
The aggregate contractual maturities of long-term debt (excluding unamortized debt issuance costs and unamortized OID)original issuance discounts and premiums) were as follows as of SeptemberJune 30, 20172019 (amounts in thousands)millions):
|
| | | |
| Total Debt |
2019 remaining | $ | 18.6 |
|
2020 | 30.4 |
|
2021 | 26.6 |
|
2022 | 26.2 |
|
2023 | 111.3 |
|
2024 and beyond | 3,052.8 |
|
| $ | 3,265.9 |
|
|
| | | |
| Total debt |
2017 remaining | $ | 1,750 |
|
2018 | 7,000 |
|
2019 | 7,000 |
|
2020 | 7,000 |
|
2021 | 7,000 |
|
2022 and beyond | 1,115,000 |
|
| $ | 1,144,750 |
|
Debt Issuance Costs and Original Issuance Discounts and Premiums
The following table summarizes the debt issuance costs activity for the ninesix months ended SeptemberJune 30, 20172019 (amounts in thousands)millions):
|
| | | | | | | | | | | | | | | | | | | |
| US Term Loan | | EMEA Term Loan | | 7.875% Senior Unsecured Notes | | Revolving Line of Credit | | Total |
Balance, December 31, 2018 | $ | (11.5 | ) | | $ | (3.2 | ) | | $ | (14.3 | ) | | $ | (2.6 | ) | | $ | (31.6 | ) |
Debt issuance costs incurred | — |
| | — |
| | — |
| | (0.2 | ) | | (0.2 | ) |
Amortization | 0.8 |
| | 0.3 |
| | 0.9 |
| | 0.3 |
| | 2.3 |
|
Balance, June 30, 2019 | $ | (10.7 | ) | | $ | (2.9 | ) | | $ | (13.4 | ) | | $ | (2.5 | ) | | $ | (29.5 | ) |
|
| | | | | | | | | | | | | | | |
| Term Loan | | 7.875% Senior Unsecured Notes | | Revolving Line of Credit | | Total |
Balance, December 31, 2016 | $ | (7,765 | ) | | $ | (481 | ) | | $ | (1,064 | ) | | $ | (9,310 | ) |
Debt issuance costs incurred | (14,467 | ) | | (13,660 | ) | | (1,754 | ) | | (29,881 | ) |
Amortization | 1,622 |
| | 812 |
| | 204 |
| | 2,638 |
|
Loss on debt extinguishment | 5,397 |
| | — |
| | 350 |
| | 5,747 |
|
Balance, September 30, 2017 | $ | (15,213 | ) | | $ | (13,329 | ) | | $ | (2,264 | ) | | $ | (30,806 | ) |
Debt issuance costs are presented in the condensed consolidated balance sheets as a reduction to "Long-termlong-term debt." Interest expense associated with the amortization of debt issuance costs was $1.0$1.1 million and $0.3$1.1 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $2.6$2.3 million and $1.2$2.3 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.
The following table summarizes the original issuance discount(discount) and premium activity for the ninesix months ended SeptemberJune 30, 20172019 (amounts in thousands)millions):
|
| | | | | | | | | | | |
| Term Loan | | 7.875% Senior Unsecured Notes | | Total |
Balance, December 31, 2016 | $ | (6,957 | ) | | $ | — |
| | $ | (6,957 | ) |
New Original Issuance (Discount)/Premium | (3,500 | ) | | 9,000 |
| | 5,500 |
|
Amortization | 781 |
| | (283 | ) | | 498 |
|
Loss on debt extinguishment | 2,900 |
| | — |
| | 2,900 |
|
Balance, September 30, 2017 | $ | (6,776 | ) | | $ | 8,717 |
| | $ | 1,941 |
|
|
| | | | | | | | | | | | | | | |
| US Term Loan | | EMEA Term Loan | | 7.875% Senior Unsecured Notes | | Total |
Balance, December 31, 2018 | $ | (39.8 | ) | | $ | (22.0 | ) | | $ | 14.0 |
| | $ | (47.8 | ) |
Amortization | 2.8 |
| | 1.6 |
| | (0.9 | ) | | 3.5 |
|
Balance, June 30, 2019 | $ | (37.0 | ) | | $ | (20.4 | ) | | $ | 13.1 |
| | $ | (44.3 | ) |
OID isOriginal issuance discounts and premiums are presented in the condensed consolidated balance sheets as a reduction to "Long-termlong-term debt." Interest expense, net associated with the amortization Amortization of OIDoriginal issuance discounts and premiums was $(27) thousand$1.6 million and $0.3$0.4 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $0.5$3.5 million and $0.6$0.2 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016, respectively.2018, respectively, and is included in interest expense, net.
The Company expensed an aggregate of $3.0 million and $8.6 million of debt issuance costs and OID that did not qualify for deferral as a "Loss on debt extinguishment" in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017, respectively.
Previous Debt Agreement - October 2015 Credit Agreement
On October 22, 2015, the Company entered into a credit agreement (the “October 2015 Credit Agreement”) that provided for a $400.0 million term loan facility and a $50.0 million revolving line of credit (which includes a $15.0 million letter of credit facility and a $10.0 million swingline facility). As of December 31, 2016, the Company had drawn $20.0 million under the revolving line
of credit and had $29.5 million of borrowing capacity available. Amounts outstanding under October 2015 Credit agreement were paid in full at the closing of the 2017 Credit Agreement. The previous term loan was issued at an OID of $8.0 million.
NOTE 78 — SHARE-BASED COMPENSATION
Share-Based Compensation Plan
The Company grants share-based equity awards, including stock options and restricted stock, under the GTT Stock Plan. The GTT Stock Plan is limited to an aggregate 9,500,00014,250,000 shares of which 8,174,24010,740,618 have been issued and are outstanding as of SeptemberJune 30, 2017.2019.
The GTT Stock Plan permits the granting of time-based stock options, time-based restricted stock, and performance-based restricted stock to employees and consultants of the Company, and non-employee directors of the Company.
Time-based options granted under the GTT Stock Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than 10 years from the grant date. The Company uses the Black-Scholes option-pricing model to determine the fair value of its stock option awards at the time of grant. The stock options generally vest over four years with 25% of the options becoming exercisable one year from the date of grant and the remaining vesting 75% annually or quarterly over the following three years.
Time-based restricted stock granted under the GTT Stock Plan is valued at the GTT closingshare price of our common stock priceas reported on the NYSE on the date of grant. Time-based restricted stock generally vests over four years with 25% of the shares becoming unrestricted one year from the date of grant and the remaining vesting 75% annually or quarterly over the following three years.
Performance-based restricted stock is granted under the GTT Stock Plan subject to the achievement of certain performance measures. Once achievement of these performance measures is considered probable, the Company starts to expense the fair value of the grant
over the vesting period. The performance-based restricted stock is valued at the closingshare price of our common stock as reported on the NYSE on the date of grant. The performance grant vests quarterly over the vesting period once achievement of the performance measure has been met and approved by the Compensation Committee.Committee, typically one to two years.
The Compensation Committee of the Board of Directors, as administrator of the GTT Stock Plan, has the discretion to authorize a different vesting schedule for any awards.
In 2019, the Company implemented a sell-to-cover program for employees who elect to sell shares to cover any withholding taxes due upon vesting. Previously the Company netted shares upon vesting and paid the withholding taxes directly.
Share-Based Compensation Expense
The following tables summarize the share-based compensation expense recognized as a component of selling, general and administrative expenseexpenses in the condensed consolidated statements of operations (amounts in thousands)millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Stock options | $ | 0.1 |
| | $ | 0.3 |
| | $ | 0.3 |
| | $ | 0.6 |
|
Restricted stock | 7.4 |
| | 8.4 |
| | 15.7 |
| | 13.9 |
|
ESPP | 0.1 |
| | 0.1 |
| | 0.3 |
| | 0.1 |
|
Total | $ | 7.6 |
| | $ | 8.8 |
| | $ | 16.3 |
| | $ | 14.6 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Stock options | $ | 354 |
| | $ | 446 |
| | $ | 1,029 |
| | $ | 1,178 |
|
Restricted stock | 5,666 |
| | 4,356 |
| | 14,802 |
| | 9,625 |
|
ESPP | 38 |
| | 42 |
| | 129 |
| | 93 |
|
Total | $ | 6,058 |
| | $ | 4,844 |
| | $ | 15,960 |
| | $ | 10,896 |
|
As of SeptemberJune 30, 2017,2019, there was $47.1$70.2 million of total unrecognized compensation cost related to unvested share-based compensation awards. The following table summarizes the unrecognized compensation cost and the weighted average period over which the cost is expected to be amortized (amounts in thousands)millions):
|
| | | | | |
| June 30, 2019 |
| Unrecognized Compensation Cost | | Weighted Average Remaining Period to be Recognized (Years) |
Time-based stock options | $ | 0.2 |
| | 0.59 |
Time-based restricted stock | 62.8 |
| | 2.44 |
Performance-based restricted stock (1) | 7.2 |
| | 1.00 |
Total | $ | 70.2 |
| | 2.29 |
|
| | | | | |
| September 30, 2017 |
| Unrecognized Compensation Cost | | Weighted Average Remaining Period to be Recognized (Years) |
Time-based stock options | $ | 2,229 |
| | 1.68 |
Time-based restricted stock | 33,511 |
| | 2.45 |
Performance-based restricted stock | 11,349 |
| | 1.39 |
Total | $ | 47,089 |
| | 2.16 |
(1)Excludes $31.2 millionand$16.3 million of unrecognized compensation cost related to the 2018 Performance Awards and 2017 Performance Awards, respectively, where achievement of the performance criteria was not probable as of June 30, 2019.
The following tables summarizetable summarizes the stock options and restricted stock granted during the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 (amounts in thousands,millions, except shares data):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Time-based stock options granted | — |
| | 3,000 |
| | — |
| | 158,958 |
| |
Fair value of stock options granted | $ | — |
| | $ | 30 |
| | $ | — |
| | $ | 971 |
| |
| | | | | | | | |
Time-based restricted stock granted | 258,088 |
| | 100,059 |
| | 949,896 |
| | 629,362 |
| 84,590 |
| | 242,465 |
| | 682,731 |
| | 618,687 |
|
Fair value of time-based restricted stock granted | $ | 8,076 |
| | $ | 1,846 |
| | $ | 28,066 |
| | $ | 9,170 |
| $ | 2.3 |
| | $ | 11.7 |
| | $ | 21.6 |
| | $ | 29.6 |
|
| | | | | | | | |
Performance-based restricted stock granted | | 20,000 |
| | — |
| | 44,000 |
| | 8,000 |
|
Fair value of performance-based restricted stock granted | | $ | 0.4 |
| | $ | — |
| | $ | 1.2 |
| | $ | 0.4 |
|
No stock options were issued in any period presented.
Performance-based Restricted Stock
The Company granted $8.5 million of restricted stock during 2014 and early 2015 contingent upon the achievement of certain performance criteria (the "2014 Performance Awards"). The fair value of the 2014 Performance Awards was calculated using the value of GTT common stock on the grant date. The Company started recognizing share-based compensation expense for these grants when the achievement of the performance criteria became probable, which was in the third quarter of 2015. The 2014 Performance Awards started vesting in the fourth quarter of 2015 when the performance criteria were met and they will continue to vest ratably through the third quarter of 2017. As of September 30, 2017, the 2014 Performance Awards were fully vested.
The Company granted $17.4 million of restricted stock during 2015 and 2017 contingent upon the achievement of certain performance criteria (the "2015 Performance Awards"). The fair value of the 2015 Performance Awards was calculated using the value of GTT common stock on the respective grant dates. Upon announcement of the Hibernia acquisition in November 2016, the achievement of two of the four performance criteria became probable and the Company started recognizing share-based compensation expense for these grants. Expense recognition will continue throughconcluded during the first quarter of 2019. Additionally, upon announcement of the Global Capacity acquisition in June 2017, the achievement of the final two performance criteria became probable and the Company started recognizing share-based compensation expense for these grants. Expense recognition will continue through the fourth quarter of 2019. The Company recognized share-based compensation expense related to the 2015 Performance Awards of $1.5$0.2 million and $4.2$1.9 million for the three and nine months ended SeptemberJune 30, 2019 and 2018, respectively, and $1.3 million and $4.0 million for the six months ended June 30, 2019 and 2018. As of June 30, 2019, the 2015 Performance Awards were fully vested.
The Company granted $32.6 million of restricted stock during 2017 respectively. Noand 2018 contingent upon the achievement of certain performance criteria (the "2017 Performance Awards"). The fair value of the 2017 Performance Awards was calculated using the value of GTT common stock on the grant date. Upon the closing of the Interoute acquisition in May 2018, the achievement of two of the four performance criteria became probable and the Company started recognizing share-based compensation expense wasfor these grants. Expense recognition is expected to continue through the second quarter of 2020. The Company recognized duringshare-based compensation expense related to the comparable 2016 period.2017 Performance Awards of $2.0 million and $1.8 million for the three months ended June 30, 2019 and 2018, respectively, and $3.8 million and $1.8 million for the six months ended June 30, 2019 and 2018, respectively. As of SeptemberJune 30, 2017, unamortized2019, unrecognized compensation cost related to the unvested 20152017 Performance Awards was $11.3$23.5 million, inclusive of unrecognized compensation cost where achievement of the performance criteria was not probable as of June 30, 2019.
The Company granted $31.2 million of restricted stock during 2018 and 2019 contingent upon the achievement of certain performance criteria (the "2018 Performance Awards"). The fair value of the 2018 Performance Awards was calculated using the value of GTT common stock on the grant date. As of June 30, 2019, achievement of the performance criteria was not probable. Accordingly, the Company recognized no share-based compensation expense for the three or six months ended June 30, 2019. As of June 30, 2019, unrecognized compensation cost related to the unvested 2018 Performance Awards was $31.2 million.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan ("ESPP") that permits eligible employees to purchase common stock through payroll deductions at the lessorlesser of the opening stock price or 85% of the closing stock price of the common stock during each of the three-month offering periods. The Company expenses the discount offered as additional share-based compensation expense. The offering periods generally commence on the first day and the last day of each quarter. At SeptemberJune 30, 2017, 444,9942019, 353,179 shares were available for issuance under the ESPP.
NOTE 89 — INCOME TAXES
The Company’s provision for income taxes is determined using an estimate of its annual effective tax rate, adjusted for the effect of discrete items arising in the quarter. Each quarter the Company updateupdates its estimate of the annual effective tax rate.
The quarterly tax provision and the quarterly estimate of the Company's annual effective tax rate is subject to significant variation due to several factors, including variability in accurately predicting pre-tax and taxable income (loss) and the mix of jurisdictions to which they relate, effects of acquisitions and integrations, audit-related developments, changes in the Company's stock price, foreign currency gains (losses), and tax law developments. Additionally, the Company's effective tax rate may be more or less volatile based on the amount of pre-tax income or loss and impact of discrete items.
For the nine months ended September 30, 2017, theThe Company recorded a provision for (benefit from) income taxes of $0.2 million and $(1.1) million for the three months ended June 30, 2019 and 2018, respectively, and $2.0 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively.
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the Company's existing deferred tax benefitassets. A significant piece of $22.7objective negative evidence identified during the Company's evaluation was the cumulative loss incurred over the three year period ended December 31, 2018. Such objective evidence limits the ability to consider other subjective evidence, such as the Company's forecasts of future taxable income and tax planning strategies. On the basis of this evaluation as of June 30, 2019 and December 31, 2018, the Company recognized a valuation allowance against its net U.S. deferred tax assets under the criteria of ASC 740 of $73.3 million which included $5.4and $73.3 million, respectively, and the Company recognized a valuation allowance against its net foreign deferred tax assets under the criteria of net discreteASC 740 of $110.9 million and $89.6 million, respectively. The amount of U.S. deferred tax benefits primarily attributableasset considered realizable, has been recorded to excessrecognize only the portion of the deferred tax benefits from share-based compensation.asset that is more likely than not to be realized. The amount of the deferred tax
asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as forecasted taxable income. The Company will continue to evaluate the need to record valuation allowances against deferred tax assets and will make adjustments in accordance with ASC 740.
NOTE 910 — SEVERANCE, RESTRUCTURING, AND OTHER EXIT COSTS
The Company incurred severance, restructuring and other exit costs associated with the acquisition of Hibernia, Perseus, and Global Capacity.2018 acquisitions. These costs include employee severance costs, termination costs associated with facility leases and network agreements, and other exit costs related to the transactions. The Company records the current portion of severance, restructuring and other exit costs as a component of accrued expenses and other current liabilities and the long-term portion of severance, restructuring and other exit costs as a component of other long-term liabilities.
The total exit costs recorded and paid relating to the acquisitions mentioned above are summarized as follows for the ninesix months ended SeptemberJune 30, 20172019 (amounts in thousands)millions):
|
| | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2018 | | Charges | | Payments | | Other Adjustments(1) | | Balance, June 30, 2019 |
Employee termination benefits | $ | 7.4 |
| | $ | 5.2 |
| | $ | (7.3 | ) | | $ | 1.4 |
| | $ | 6.7 |
|
Lease terminations | 9.3 |
| | 2.4 |
| | (3.5 | ) | | (1.6 | ) | | 6.6 |
|
Other contract terminations | 9.1 |
| | 1.6 |
| | (6.1 | ) | | 0.2 |
| | 4.8 |
|
| $ | 25.8 |
| | $ | 9.2 |
| | $ | (16.9 | ) | | $ | — |
| | $ | 18.1 |
|
(1) Other Adjustments includes certain reclassifications between categories as well as Foreign Currency Translation adjustments |
|
| | | | | | | | | | | | | | | |
| Balance, December 31, 2016 | | Charges and Adjustments | | Payments | | Balance, September 30, 2017 |
Employee Termination Benefits | $ | 42 |
| | $ | 16,132 |
| | $ | (7,349 | ) | | $ | 8,825 |
|
Contract Terminations: | | | | | | | |
Lease terminations | 859 |
| | 3,491 |
| | (744 | ) | | 3,606 |
|
Other contract terminations | 2,346 |
| | 2,225 |
| | (1,332 | ) | | 3,239 |
|
| $ | 3,247 |
| | $ | 21,848 |
| | $ | (9,425 | ) | | $ | 15,670 |
|
The totalDuring the six months ended June 30, 2018, the Company incurred severance, restructuring and other exit costs recordedof $7.2 million and paidmade payments of $11.6 million relating to prior year acquisitions are summarized as follows for the nine months ended September 30, 2016 (amounts in thousands):acquisitions.
|
| | | | | | | | | | | | | | | |
| Balance, December 31, 2015 | | Charges and Adjustments | | Payments | | Balance, September 30, 2016 |
Employee Termination Benefits | $ | 1,903 |
| | $ | 870 |
| | $ | (2,728 | ) | | $ | 45 |
|
Contract Terminations: | | | | | | | |
Lease terminations | 1,503 |
| | — |
| | (838 | ) | | 665 |
|
Other contract terminations | 3,427 |
| | (102 | ) | | (586 | ) | | 2,739 |
|
| $ | 6,833 |
| | $ | 768 |
| | $ | (4,152 | ) | | $ | 3,449 |
|
NOTE 1011 — LEASES
The Company enters into contracts to lease real estate, equipment, and vehicles, and has identified embedded leases within its colocation, dark fiber, and duct supplier contracts. The lease contracts have remaining lease terms up to 32 years and certain leases include options to extend the lease term. The Company is not party to any lease contracts with related parties. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants.
The Company's lease expense is split between cost of telecommunications services and selling, general and administrative expenses in the condensed consolidated statement of operations based on the use of the asset for which lease expense is being paid. The components of lease expense for the period were as follows (amounts in millions):
|
| | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Operating lease expense | $ | 25.0 |
| | $ | 53.6 |
|
Finance lease expense: | | | |
Amortization of right of use assets | 0.5 |
| | 1.0 |
|
Interest on lease liabilities | 0.9 |
| | 2.1 |
|
Total finance lease expense | 1.4 |
| | 3.1 |
|
Short-term lease expense | 5.3 |
| | 10.7 |
|
Variable lease expense | 7.3 |
| | 15.0 |
|
Total lease expense | $ | 39.0 |
| | $ | 82.4 |
|
Supplemental cash flow information related to leases for the period was as follows (amounts in millions):
|
| | | |
| Six Months Ended June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 59.9 |
|
Operating cash flows from finance leases | 2.1 |
|
Financing cash flows from finance leases | 0.6 |
|
| |
Right of use assets obtained in exchange for new operating lease liabilities | 12.8 |
|
Right of use assets obtained in exchange for new finance lease liabilities | — |
|
Supplemental balance sheet information related to leases for the period was as follows:
|
| | |
| June 30, 2019 |
Weighted average remaining lease term (amounts in years) | |
Operating leases | 6.49 |
|
Finance leases | 23.37 |
|
| |
Weighted average discount rate | |
Operating leases | 5.5 | % |
Finance leases | 13.0 | % |
Maturities of lease liabilities were as follows (amounts in millions):
|
| | | | | | | |
| Operating Leases | | Finance Leases |
2019 remaining | $ | 49.4 |
| | $ | 2.7 |
|
2020 | 91.4 |
| | 5.5 |
|
2021 | 81.9 |
| | 5.2 |
|
2022 | 63.3 |
| | 5.2 |
|
2023 | 48.1 |
| | 5.2 |
|
2024 and beyond | 128.4 |
| | 117.0 |
|
Total lease payments | 462.5 |
| | 140.8 |
|
Less: Present value discount | (80.8 | ) | | (98.7 | ) |
Present value of lease obligations | $ | 381.7 |
| | $ | 42.1 |
|
NOTE 12 — COMMITMENTS AND CONTINGENCIES
Estimated annual commitments under contractual obligations, excluding those related to long-term debt and operating and finance leases, are as follows at SeptemberJune 30, 20172019 (amounts in thousands)millions):
|
| | | | | | | |
| Network Supply | | Other |
2019 remaining | $ | 245.8 |
| | $ | 4.0 |
|
2020 | 402.0 |
| | 7.4 |
|
2021 | 281.0 |
| | 5.6 |
|
2022 | 140.7 |
| | 2.9 |
|
2023 | 32.9 |
| | 2.1 |
|
2024 and beyond | 128.1 |
| | 5.8 |
|
| $ | 1,230.5 |
| | $ | 27.8 |
|
|
| | | | | | | | | | | | | | | |
| Network Supply | | Office Space | | Capital Leases | | Other |
2017 remaining | $ | 40,310 |
| | $ | 1,726 |
| | $ | 560 |
| | $ | 796 |
|
2018 | 115,656 |
| | 5,774 |
| | 1,277 |
| | 628 |
|
2019 | 62,454 |
| | 4,962 |
| | 223 |
| | 1,500 |
|
2020 | 21,314 |
| | 3,974 |
| | — |
| | 1,500 |
|
2021 | 7,008 |
| | 3,462 |
| | — |
| | 1,125 |
|
2022 and beyond | 44,100 |
| | 7,992 |
| | — |
| | — |
|
| $ | 290,842 |
| | $ | 27,890 |
| | $ | 2,060 |
| | $ | 5,549 |
|
Refer to Note 7 - Debt for the aggregate contractual maturities of long-term debt (excluding unamortized debt issuance costs and unamortized original issuance discounts and premiums) at June 30, 2019 and refer to Note 11 - Leases for the aggregate contractual maturities of operating leases and finance leases at June 30, 2019.
Network Supply Agreements
As of SeptemberJune 30, 2017,2019, the Company had purchase obligations of $290.8$1,230.5 million associated with the telecommunications services that the Company has contracted to purchase from its suppliers.suppliers that are not accounted for as operating leases. The Company’s supplier agreements fall into two key categories, the Company's core networkIP backbone and customer specific locations (also referred to as 'last mile'"last mile" locations). Supplier agreements associated with the Company's core networkIP backbone are typically contracted on a one-yearone year term and do not relate to any specific underlying customer commitments. The short-term duration allows the Company to take advantage of favorable pricing trends.
Supplier agreements associated with the Company's customer specific locations, which representsrepresent the substantial majority of the Company's network spending, are typically contracted so the terms and conditions in both the vendor and customer contracts are substantially the same in terms of duration and capacity. The back-to-back nature of the Company’s contracts means that its network supplier obligations are generally mirrored by its customers' commitments to purchase the services associated with those obligations.
Office Space and Leases
The Company is currently headquartered in McLean, Virginia and has 17 other offices throughout North America, seven offices in Europe, one office in India, two offices in Hong Kong, and two offices in Brazil. The Company records rent expense using the straight-line method over the term of the respective lease agreement. Office facility rent expense was $1.1 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively, and $3.2 million and $2.6 million for the nine months ended September 30, 2017 and 2016, respectively.
Legal Proceedings
From time to time, the Company is a party to legal proceedings arising in the normal course of its business. As of September 30, 2017, theThe Company does not believe that it is a party to any current or pending legal action that could reasonably be expected to have a material adverse effect on its financial condition or results of operations and cash flows.flow.
NOTE 13 — SUBSEQUENT EVENTS
On August 8, 2019 GTT announced that its Board of Directors had adopted a Section 382 Rights Agreement (NOL Rights Plan). The NOL Rights Plan is designed to protect GTT's net operating loss carryforwards (NOLs) available under Section 382 of the Internal Revenue Code (Code). At June 30, 2019, GTT had approximately $217.0 million of NOLs available for use to offset GTT's future federal taxable income.
Under the NOL Rights Plan, one right will be distributed for each share of the Company’s common stock outstanding as of the close of business on August 19, 2019, and will trade with the common stock until the rights expire or detach based on the occurrence of certain events as further described in the NOL Rights Plan agreement.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report on Form 10-Q, as well as the consolidated financial statements and Management's Discussion and Analysis ("MD&A") ofin our Annual Report.Report on Form 10-K for the fiscal year ended December 31, 2018. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.
We have attempted to identify these forward-looking statements by the use of words such as “may,” “will,” “seek,” “expects,” “anticipates,” “believes,” “targets,” “intends,” “should,” “estimates,” “could,” “continue,” “assume,” “projects,” “plans” or similar expressions.Our actual results, performance or achievements could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, those discussed below. but are not limited to:
We are subject to risks associated with the actions of network providers and a concentrated number of vendors and customers.
We could be subject to cyber-attacks and other security breaches.
Our network could suffer serious disruption if certain locations experience damage or as we add features and update our network.
We are subject to risks associated with purchase commitments to vendors for longer terms or in excess of the volumes committed by our underlying customers, or sales commitments to customers that extend beyond our commitments from our underlying suppliers.
We may be unable to establish and maintain peering relationships with other providers or agreements with carrier neutral data center operators.
We may be affected by information systems that do not perform as expected or by consolidation, competition, regulation, or a downturn in our industry.
We may be liable for the material that content providers distribute over our network.
We have generated net losses historically and may continue to do so.
We may fail to successfully integrate any future acquisitions or to efficiently manage our growth.
We may be unable to retain or hire key employees.
We are subject to risks relating to the international operations of our business.
We may be affected by future increased levels of taxation.
We have substantial indebtedness, which could prevent us from fulfilling our obligations under our debt agreements or subject us to interest rate risk.
For a more complete description of the risks noted above and other risks that could cause our actual results to materially differ from our current expectations, please see Item 1A “Risk Factors”"Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, which we refer to as our Annual Report. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “GTT,” or the “Company” mean GTT Communications, Inc. together with its consolidated subsidiaries.
Executive Summary
GTT Communications, Inc. isserves large enterprise and carrier clients with complex national and global networking needs, and differentiate ourselves from the competition by providing an outstanding service experience built on our core values of simplicity, speed and agility. We operate a providerTier 1 internet network ranked among the largest in the industry, and own a fiber network that includes an expansive pan-European footprint and subsea cables. Our global network includes over 600 points of presence (PoPs) spanning six continents, and we provide services in more than 140 countries. Our comprehensive portfolio of cloud networking services to multinational clients. We offer a broad portfolio of global services including:includes:
Wide area networking, including software-defined wide area networking (“SD-WAN”), multiprotocol label switching ("MPLS") and virtual private networking services, LAN service ("VPLS");
Internet services, optical transport, managed networkingincluding IP transit, dedicated internet access, and securitybroadband internet;
Transport & infrastructure services, voice and unified communication services,including wavelength, Ethernet, colocation, dark fiber and video transport services.transport;
Our global Tier 1 IP network delivers connectivity for our clients around the world. We provide
Voice services, to leading multinational enterprise, carrier,including Session Initiation Protocol ("SIP") trunking and government customers in over 100 countries. We strive to differentiate ourselves from our competition by delivering service to our clients with simplicity, speed,hosted Private Branch Exchange ("PBX"); and agility.
Other managed services, including managed equipment, managed security, and managed hosting.
We deliver six primary service offerings to our customers:
Wide Area Networking
Private Networking Services
We provide Layer 2 (Ethernet) and Layer 3 (MPLS and IP-VPN) privatea variety of wide area networking solutions to meet the growing needs of multinational enterprises, carriers, service providers,our clients, including SD-WAN, MPLS, and content delivery networks regardless of location.VPLS. We design and implement custom private, public, and hybrid cloud network solutions for our customers, offering bandwidth speeds from 10 Mbps to 100 Gbps per port with burstable and aggregate bandwidth capabilities. All services are available on a protected basis with the ability to specify pre-configured alternate routes to minimize the impact of any network disruption.
Through GTT's privatewide area networking services, clients can securely connect to cloud service providers in data centers and exchanges around the world. Our Cloud Connect feature provides private, secure, pre-established connectivity to leading cloud service providers. ClientsUsing GTT's global network, clients can connect to GTTany office location in one locationthe world and haveto any application in the cloud.
SD-WAN is an enterprise networking technology in the early stages of market adoption with high growth potential. The software-based network intelligence in SD-WAN enables more efficient delivery of traffic across a mix of access types, accelerates the speed of service deployments, and improves application visibility and performance. GTT’s SD-WAN delivers managed global connectivity, enhanced application performance and control, and secure access to a broadcloud-based services and applications. Our service leverages GTT’s global, Tier 1 IP network, securely connecting client locations to any destination on the internet or to any cloud service provider ecosystem from anywhere inprovider. We offer the world.widest range of access options with bundled network security, making it simple and cost-effective to integrate new locations and add network bandwidth as needed.
Internet Services
We offer domestic and multinational customersclients scalable, high-bandwidth global Internetinternet connectivity and IP transit with guaranteed availability and packet delivery.delivery, utilizing our Tier global 1 IP network. Our Internet services offer flexible connectivity with multiple port interfaces including Fast Ethernet, Gigabit Ethernet, 10 Gigabit Ethernet, and 100 Gigabit Ethernet. We also offer a wide range of broadband internet and wireless internet access services. We support a dual stack of IPv4 and IPv6 protocols, enabling the delivery of seamless IPv6 services alongside existing IPv4 services.
Transport & Infrastructure Services
Optical Transport
We provide a full suite of optical transport and infrastructure services over a coreour fiber network, enabling cloud-based applications and the transport of high volume data between data centers, large enterprise office locations, and media hubs. Our native wavelength product is designed to deliver scalable high performance optical connectivity over a state-of-the-art dense wave division multiplexing ("DWDM") platform. Our service is differentiated based on uniquean expansive pan-European fiber footprint and subsea cable infrastructure, network diversity, and low latency connections between major financial and commercial centers in North America and Europe. Our clients for these services include Internet-basedinternet-based technology companies and OTTs, large banks, and other service providers requiring network infrastructure. All services are available on a protected basis with the ability to specify pre-configured alternate routes to minimize the impact of any network disruption.
Additionally, we provideGTT’s wavelength service is designed to deliver scalable high-performance optical connectivity over a state-of-the-art dense wave division multiplexing platform. We offer low latency services between the major financial centers and exchanges, tailored to meet the requirements of proprietary trading firms for the fastest connections. Our service provides theIn particular, GTT's Express transatlantic cable offers industry leading lowest latency performance of the Express transatlantic subsea cable connectingbetween North America and Europe. We also offer dark fiber and duct services across our fiber network.
GTT’s Ethernet service enables clients to design a network environment best suited to their needs, with point-to-point and point-to-multipoint topology options, and dynamic or fixed routing. GTT’s Ethernet Direct service provides enhanced performance capabilities for clients seeking guaranteed routes and latency SLAs between key financial markets, data centers and carrier hotels over a service-specific platform. This service is particularly suited for the financial industry, including trading firms that may require a lower-bandwidth alternative to wavelength services. Financial organizations can also leverage our low-latency network to access over 60 unique routes and more than 130 financial exchanges.
We offer colocation services in over 50 facilities in Europe which is wholly owned and operated by GTT.North America. The turnkey service offering includes cabinets, racks, suites, and technical support services, providing clients with efficient and secure access to other carrier networks.
We offer a suite of video transport services for clients in the media and entertainment industry, designed to support broadcast quality transmission of live events, sports entertainment, and news. We can manage individual services, multicast distribution, and entire client networks, supporting all video formats required for today's media workflow.
Voice Services
We offer local voice service in over 55 countries around the world, along with global long-distance and toll-free services. Our SIP Trunking service delivers worldwide PSTN access to client telephony equipment over an integrated data connection, driving efficiency and productivity organization-wide while allowing clients to retain control of their core voice infrastructure. Our Hosted PBX service allows clients to eliminate traditional voice infrastructure with communication services delivered through the cloud and a wide array of features and customization choices for each site and user.
Other Managed Network and Security Services
We offer fully managed network services, including managed equipment, managed security, services, and managed secure access, enabling customers to focus on their core business. These end-to-end services cover the design, procurement, implementation, monitoring, and maintenance of a customer’s network.hosting.
GTT'sManaged CPE. Managed CPEEquipment provides a turnkey solution for the end-to-end management of customer premise equipment, from premises through the core network.equipment. This includes the design, procurement, implementation, monitoring, and maintenance of equipment including routers, switches, servers, and Wi-Fi access points.
GTT's Managed Security Services. Ouris available as a cloud-based andor premises-based security services provideservice and provides a comprehensive, multi-layered security solution that protects the network while meeting the most stringent security standards. Our Unified Threat Management (“UTM”) services include advanced firewall, intrusion detection, anti-virus, web filtering, and anti-spam. UTM services also coverGTT's DDoS Mitigation service detects and removes malicious traffic, ensuring business continuity for our clients, even in the event of a broadlarge-scale DDoS attack. The service utilizes a next-generation DDoS platform technology, which provides immediate threat detection, deep packet inspection analytics and filtering of compromised traffic at GTT’s scrubbing centers. We offer a full range of compliance requirements, offering customers Security-as-a-Service versions of managed logging, vulnerability scanning,compliancy packages, which include developing, deploying, configuring, and monitoring network and security information management that meet numerous security standards, including Payment Card Industry / Cardholder Information Security Program compliance.
assets, and providing documentation to comply with audits.
Managed Secure Access. Our Managed Secure Access service provides clients of all sizes with secure remote access to their network applications from any device, anywhere, anytime from any authorized user. Managed Secure Access extends network reach, allowing trusted users to establish a secure data connection from any browser or device using Transport Layer Security to encrypt all traffic and protect the network from unauthorized users.
Managed Software Defined Wide Area Networking (“SD-WAN”). Leveraging our success to date in delivering hybrid WAN services, GTT’s Managed SD-WANHosting service provides our clients with optimizedincludes application performancehosting and cost-effective network expansion, as well as dynamic bandwidth management,management.
Client and the ability to integrate cost-effective network technologies into the corporate WAN. With a Tier 1 IP network, extensive connectivity to leading cloud service providers across 300+ global points of presence, and a broad portfolio of diverse last mile connectivity options to any location in the world, GTT is well positioned to deliver managed SD-WAN services.
Network Supplier ContractsVoice and Unified Communication Services
Our SIP Trunking service is an enterprise-built unified communications offering that integrates voice, video, and chat onto a single IP connection, driving efficiency and productivity organization-wide. Our Enterprise PBX service allows clients to eliminate traditional voice infrastructure with communication services delivered throughclient contracts are most commonly three years for the cloud. The offering includes fully hosted and hybrid models for maximum flexibility.
Video Transport Services
We provide a suite of fully-managed video transport services. Our services are designed to support our clients' requirements for stringent broadcast quality, providing 100% quality of service for transmission of live events, sports entertainment, and news. Our service options include Dedicated, Occasional Use, and IP Video. We manage individual services, multicast distribution, and entire client networks, supporting all forms of signal management required for today's media workflow. GTT's video transport services are based on the core principle of "any signal, any format, anywhere." Our clients include many of the world's top broadcasters and cable programming providers.
Customer and Network Contracts
Our customer contracts generallyinitial term but can range from one to five years or more for the initial term.sometimes longer. Following the initial term, these agreements typically provide for automatic renewal for specified periods ranging from one month to one year. Our prices are fixed for the duration of the contract, and we typically bill monthly in advance for such services. If a customerclient terminates its agreement, the terms of our customerclient contracts typically require full recovery of any amounts due for the remainder of the term or, at a minimum, our liability to any underlying suppliers.
Our revenue is composed of three primary categories that include recurring revenue non-recurring revenue, and usagenon-recurring revenue. Recurring revenue relates to contracted ongoing service that is generally fixed in price and paid by the customer on a monthly basis for the contracted term. For the ninesix months ended SeptemberJune 30, 2017,2019, recurring revenue was approximately 93% of our total revenue. Non-recurring revenue primarily includes the amortization of previously collected installation and equipment charges to customers, andclients, one-time termination charges for customersclients who cancel their services prior to the contract termination date. Usagedate, and usage revenue which represents variable revenue based on whether a customer exceeds its committed usage threshold as specified in the contract.
Our network supplier contracts do not have any market related net settlement provisions. We have not entered into, and do not plan to enter into, any supplier contracts which involve financial or derivative instruments. The supplier contracts are entered into solely for the direct purchase of telecommunications capacity, which is resold by us in the normal course of business.
Other than cost of telecommunication services provided, our most significant operating expenses are employment costs. As of SeptemberJune 30, 2017,2019, we had 1,166approximately 3,000 full-time equivalent employees. For the ninesix months ended SeptemberJune 30, 2017,2019, the total employee cash compensation and benefits represented approximately 12% of total revenue.
Recent Developments Affecting Our Results
Business Acquisitions
Since our formation, we have consummated a number of transactions accounted for as business combinations which were executed as part of our strategy of expanding through acquisitions. These acquisitions, which are in addition to our periodic purchases of customer contracts, have allowed us to increase the scale at which we operate which in turn affords us the ability to increase our operating leverage, extend our network, and broaden our customer base. The accompanying condensed consolidated financial statements include the operations of the acquired entities from their respective acquisition dates.
Hibernia
In January 2017, we acquired Hibernia Networks ("Hibernia") for $529.6 million in cash consideration, of which $14.6 million was net cash acquired, and 3,329,872 unregistered shares of our common stock. The results of Hibernia have been included from January 1, 2017.
Perseus
In June 2017, we acquired Perseus Telecom ("Perseus") for $37.5 million in cash consideration andThere were no acquisitions completed during the assumption of approximately $1.9 million in capital leases. The results of Perseus have been included from June 1, 2017.
Global Capacity
In September 2017, we acquired Global Capacity for $104.0 million in cash consideration, of which $4.0 million was net cash acquired, and 1,850,000 unregistered shares of our common stock. The results of Global Capacity have been included from September 15, 2017.
Asset Purchases
Periodically we acquire customer contracts that we account for as an asset purchase and record a corresponding intangible asset that is amortized over its assumed useful life. During the ninesix months ended SeptemberJune 30, 2017, we acquired customer contracts for an aggregate purchase price of $37.3 million, of which $14.9 million was paid2019.
For material acquisitions completed during the nine months ended September 30, 2017 at the acquisitions' respective closing dates. Of the remaining $22.4 million, $2.9 million was paid during the nine months ended September 30,2018, 2017, and 2016, refer to Note 3 - Business Acquisitions to the remaining $19.5 million is expected to be paidconsolidated financial statements contained in the remainder of 2017 and 2018, subject toCompany's Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
any indemnification claims made through the final payment date. During 2016, we acquired customer contracts for an aggregate purchase price of $41.3 million, of which $20.0 million was paid in 2016 at the respective closing dates, and $6.0 million was paid during the nine months ended September 30, 2016. Of the remaining $21.3 million, $18.0 million was paid during the nine months ended September 30, 2017 and the remaining $3.3 million is expected to be paid in the remainder of 2017, subject to any indemnification claims made through the final payment dates.
Indebtedness
The following summarizes our long-term debt at September 30, 2017 and December 31, 2016 (amounts in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| | | |
Term loan | $ | 694,750 |
| | $ | 425,775 |
|
7.875% Senior unsecured notes | 450,000 |
| | 300,000 |
|
Revolving line of credit | — |
| | 20,000 |
|
Total debt obligations | 1,144,750 |
| | 745,775 |
|
Unamortized debt issuance costs | (30,806 | ) | | (9,310 | ) |
Unamortized original issuance premium (discount), net | 1,941 |
| | (6,957 | ) |
Carrying value of debt | 1,115,885 |
| | 729,508 |
|
Less current portion | (7,000 | ) | | (4,300 | ) |
| $ | 1,108,885 |
| | $ | 725,208 |
|
2017 Credit Agreement
In January 2017, we entered into a credit agreement (the "2017 Credit Agreement") that provides a $700.0 million term loan facility and a $75.0 million revolving line of credit facility (which includes a $25.0 million letter of credit facility). In addition, we may request incremental term loan and/or incremental revolving loan commitments in an aggregate amount not to exceed the sum of $150.0 million and an unlimited amount that is subject to pro forma compliance with certain net secured leverage ratio tests provided, however, that incremental revolving loan commitments may not exceed $25.0 million.
The maturity date of the term loan facility is January 2024 and the maturity date of the revolving loan facility is January 2022. The principal amount of the term loan facility is payable in equal quarterly installments of $1.8 million, commencing on March 31, 2017 and continuing thereafter until the maturity date, when the remaining balance of outstanding principal amount is payable in full. In addition to scheduled mandatory repayments, the Company is also required to repay an amount of up to 50% of Excess Cash Flow (as defined in the Credit Agreement). No such excess cash payments were made during the nine months ended September 30, 2017.
We may prepay loans under the 2017 Credit Agreement at any time, subject to certain notice requirements and LIBOR breakage costs.
At our election, the loans under the 2017 Credit Agreement may be made as either Base Rate Loans or Eurodollar Loans. The Eurodollar Loans are subject to a floor of 1.00%.
In July 2017, we entered into Amendment No. 1 (the "Repricing Amendment") to the 2017 Credit Agreement. The Repricing Amendment, among other things, reduced the applicable margin on Tranche B Term Loans from 3.00% to 2.25% for Base Rate Loans and from 4.00% to 3.25% for Eurodollar Loans, and reduced the applicable margin on Revolving Loans from 2.50% to 2.00% for Base Rate Loans and from 3.50% to 3.00% for Eurodollar Loans. The amendment also established a soft call protection of 1.0% through January 10, 2018 for certain prepayments, refinancings, and amendments.
In October 2017,On June 5, 2019, we entered into an Incremental Revolving Credit Assumption Agreement ("Incremental Agreement") to increase ourthe 2018 Credit Agreement. The Incremental Agreement establishes $50.0 million in new revolving linecredit commitments, bringing the total sum of revolving credit facility from $75.0 millioncommitments under the 2018 Credit Agreement, as modified by the Incremental Agreement, to $100.0$250.0 million. The revolving credit commitments made pursuant to the Incremental Agreement have terms and conditions identical to the existing revolving credit commitments under the 2018 Credit Agreement.
The 20172018 Credit Agreement does not contain a financial covenant for the term loan facility,US Term Loan Facility or the EMEA Term Loan Facility, but includesit does include a maximum consolidated net secured leverage ratioConsolidated Net Secured Leverage Ratio applicable to the revolving credit facilityRevolving Line of Credit Facility in the event that utilization exceeds 30% of the revolving loan facility commitment. On August 8, 2019, we entered into Amendment No. 1 to the 2018 Credit Agreement, which amends the Consolidated Net Secured Leverage Ratio applicable to the Revolving Line of Credit Facility for each fiscal quarter ending September 30, 2019 through December 31, 2020. If triggered, the covenant, as amended, requires us to maintain a Consolidated Net Secured Leverage Ratio, on a Pro Forma Basis, below the maximum ratio specified as follows:
|
| | |
Fiscal Quarter Ending | | Maximum Ratio |
June 30, 2019 | | 6.50:1 |
September 30, 2019 | | 6.50:1 |
December 31, 2019 | | 6.50:1 |
March 31, 2020 | | 6.50:1 |
June 30, 2020 | | 6.50:1 |
September 30, 2020 | | 6.25:1 |
December 31, 2020 | | 6.25:1 |
March 31, 2021 | | 5.50:1 |
June 30, 2021 | | 5.00:1 |
September 30, 2021 | | 5.00:1 |
December 31, 2021 | | 4.50:1 |
March 31, 2022 | | 4.50:1 |
June 30, 2022 and thereafter | | 4.25:1 |
7.875% Senior Unsecured Notes
As of June 30, 2019, our Consolidated Net Secured Leverage Ratio, as defined in the 2018 Credit Agreement, was 5.2:1, which is below the maximum permitted ratio of 6.50:1.
In December 2016 we completed a private offering of $300.0 million aggregate principal amount of 7.875% senior unsecured notes dueaddition, Amendment No. 1 to the 2018 Credit Agreement added the certain restrictions, which remain in 2024 (the "Original Notes"). The proceedsplace from the effective date of the Original Notes were deposited into escrow, where the funds remainedAmendment No. 1 until the closingdelivery of the acquisition of Hiberniacompliance certificate for the quarter ending March 31, 2021, demonstrating compliance with the Consolidated Net Secured Leverage Ratio for that quarter, including without limitation the following: the Company and its restricted subsidiaries (as defined in January 2017. We recognized the proceeds2018 Credit Agreement) may not make certain dividends, distributions and other restricted payments (as defined in the 2018 Credit Agreement), including that the Company may not pay dividends; the Company and its restricted subsidiaries may not designate any subsidiary an “Unrestricted Subsidiary” (which would effectively remove such subsidiary from the private offering asrestrictions of the 2018 Credit Agreement); the Company and its restricted subsidiaries may not make “permitted acquisitions” (as defined in the 2018 Credit Agreement) or certain other investments, unless the Company and its restricted subsidiaries have liquidity (i.e., unrestricted cash and cash equivalents in our consolidated financial statements asand availability under the revolving credit facility under the 2018 Credit Agreement) of December 31, 2016,at least $250 million (other than the acquisition of KPN Eurorings B.V., a private limited liability company (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands with respect to which were subsequently released with the closing of Hibernia. In connection with the offering, we incurred debt issuance costs of $9.7 million, of which $0.5 million was incurred in 2016this liquidity requirement is not applicable); and the remainder was incurred in 2017.
In June 2017, we completed a private offering of $150.0 million aggregate principal amount of 7.875% senior unsecured notes dueincremental borrowings under the 2018 Credit Agreement that the Company and its subsidiaries may request when the Consolidated Net Secured Leverage Ratio is above 4.40
to 1.00 the Company and its subsidiaries was reduced to $300 million minus amounts previously requested (which amount is $50 million requested under the Incremental Agreement described above).
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in 2024 (the "June 2017 Notes"). The June 2017 Notes will be treateda business combination. Goodwill is reviewed for impairment at least annually, in October, or more frequently if a triggering event occurs between impairment testing dates. We operate as a single series of debt securities with the Company's Original Notes (together with the Original Notes, the "Existing Notes"). The June 2017 Notes have identical terms as the Original Notes, other than the issue dateoperating segment and offering price. The June 2017 Notes were issued at a premium of $9.0 million. In connection with the offering, we incurred debt issuance costs of $2.9 million.
In October 2017, we completed a private offering of $125.0 million aggregate principal amount of 7.875% senior unsecured notes due in 2024 (the "October 2017 Notes"). The October 2017 Notes will be treated as a single seriesreporting unit for the purpose of debt securitiesevaluating goodwill impairment. Our impairment assessment begins with a qualitative assessment to determine whether it is more like than not that fair value of the Existing Notes.reporting unit is less than its carrying value. The October 2017 Notesqualitative assessment includes comparing our overall financial performance against the planned results used in the last quantitative goodwill impairment test. Additionally, our fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative impairment test is performed. Under the quantitative impairment test, the estimated fair value of the reporting unit would be compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value then no impairment exists. If the estimated fair value of the reporting unit is less than its carrying value, an impairment loss would be recognized for the excess of the carrying value of the reporting unit over the fair value, not to exceed the carrying amount of goodwill.
Fair value of the Company under the quantitative impairment test is determined using a combination of both income and market-based approaches, weighted 40% and 60%, respectively. The assumptions which have identical termsthe most significant effect on fair value derived using the income approach are (1) revenue growth rates, (2) the discount rate, (3) terminal growth rates, and (4) foreign currency rates. The assumptions used in the market approach include (1) the stock price of the Company and (2) the selection of comparable companies. We identified a triggering event during the three months ended June 30, 2019 due to the significant decline in our stock price. Accordingly, the we performed an assessment of fair value using policy outlined above. There were no triggering events or goodwill impairments identified for the six months ended June 30, 2018.
Based upon the results of our fair value analysis, we estimated fair value exceeded our carrying value by approximately 21%. We consider the assumptions used in our analysis to be our best estimates across a range of possible outcomes based on available evidence at the time of the assessment. While we concluded no impairment at this time, our goodwill is at risk of future impairment in the event of significant unexpected changes in our forecasted future results and cash flows, or if there is a negative change in the long-term outlook for the business or in other factors such as the Existing Notes, other than the issue date and offering price. The October 2017 Notes were issued at a premium of $7.5 million. In connection with the offering, we incurred debt issuance costs of $2.0 million.discount rate.
Previous Debt Agreement
In October 2015, we entered into the October 2015 Credit Agreement, which provided for a $400.0 million term loan facility and a $50.0 million revolving line of credit facility (which included a $15.0 million letter of credit facility and a $10.0 million swingline facility). As of December 31, 2016, we had drawn $20.0 million under the revolving line of credit and had $29.5 million of available borrowing capacity. Amounts outstanding under the October 2015 Credit Agreement were repaid in full in connection with the 2017 Credit Agreement. The previous term loan was issued at an OID of $8.0 million.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. For information regarding our critical accounting policies and estimates, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162018 and Note 12 - Significant Accounting Policies to our consolidated financial statements contained therein. There have been no material changes to the critical accounting policies previously disclosed in that report.report, and subsequently issued amendments on January 1, 2019. Refer to Note 1 - Organization and Business to our condensed consolidated financial statements contained herein.
Results of Operations
Three months ended SeptemberJune 30, 20172019 compared to three months ended SeptemberJune 30, 20162018
Overview. The financial information presented in the tables below is comprised of the unaudited condensed consolidated financial information for the three months ended SeptemberJune 30, 20172019 and 20162018 (amounts in thousands)millions):
| | | Three Months Ended September 30, | Three Months Ended June 30, |
| 2017 | | 2016 | | $ Variance | % Change | 2019 | | 2018 | | $ Variance | | % Change |
| | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | |
Telecommunications services | $ | 198,858 |
| | $ | 131,851 |
| | $ | 67,007 |
| 50.8 | % | $ | 433.8 |
| | $ | 326.8 |
| | $ | 107.0 |
| | 32.7 | % |
| | | | | |
|
| | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Cost of telecommunications services | 100,068 |
| | 68,184 |
| | 31,884 |
| 46.8 | % | 237.5 |
| | 179.4 |
| | 58.1 |
| | 32.4 | % |
Selling, general and administrative expenses | 51,966 |
| | 37,177 |
| | 14,789 |
| 39.8 | % | 97.6 |
| | 89.7 |
| | 7.9 |
| | 8.8 | % |
Severance, restructuring and other exit costs | 11,125 |
| | (625 | ) | | 11,750 |
| (1,880.0 | )% | 6.4 |
| | 5.3 |
| | 1.1 |
| | 20.8 | % |
Depreciation and amortization | 32,847 |
| | 14,880 |
| | 17,967 |
| 120.7 | % | 61.2 |
| | 48.2 |
| | 13.0 |
| | 27.0 | % |
| | | | | | | |
Total operating expenses | 196,006 |
| | 119,616 |
| | 76,390 |
| 63.9 | % | 402.7 |
| | 322.6 |
| | 80.1 |
| | 24.8 | % |
| | | | | | | |
Operating income | 2,852 |
| | 12,235 |
| | (9,383 | ) | (76.7 | )% | 31.1 |
| | 4.2 |
| | 26.9 |
| | 640.5 | % |
| | | | | |
|
| | | | | | | |
Other expense: | | | | | | | | | | | | | |
Interest expense, net | (18,251 | ) | | (7,123 | ) | | (11,128 | ) | 156.2 | % | (49.3 | ) | | (30.2 | ) | | (19.1 | ) | | 63.2 | % |
Loss on debt extinguishment | (2,988 | ) | | — |
| | (2,988 | ) | * |
| — |
| | (13.8 | ) | | 13.8 |
| | * |
|
Other expense, net | 220 |
| | (74 | ) | | 294 |
| (397.3 | )% | (14.9 | ) | | (97.6 | ) | | 82.7 |
| | (84.7 | )% |
| | | | | |
|
| |
Total other expense | (21,019 | ) | | (7,197 | ) | | (13,822 | ) | 192.1 | % | (64.2 | ) | | (141.6 | ) | | 77.4 |
| | (54.7 | )% |
| | | | | |
|
| |
(Loss) income before income taxes | (18,167 | ) | | 5,038 |
| | (23,205 | ) | (460.6 | )% | |
| | | | | |
|
| |
(Benefit from) provision for income taxes | (8,648 | ) | | (89 | ) | | (8,559 | ) | * |
| |
| |
| | |
| | |
|
| |
Net (loss) income | $ | (9,519 | ) | | $ | 5,127 |
| | $ | (14,646 | ) | (285.7 | )% | |
Loss before income taxes | | (33.1 | ) | | (137.4 | ) | | 104.3 |
| | (75.9 | )% |
Provision for (benefit from) income taxes | | 0.2 |
| | (1.1 | ) | | 1.3 |
| | (118.2 | )% |
Net loss | | $ | (33.3 | ) | | $ | (136.3 | ) | | $ | 103.0 |
| | (75.6 | )% |
* - Not meaningful |
On a constant currency basis using the average exchange rates in effect during the three months ended SeptemberJune 30, 2016,2018, revenue would have been lowerhigher by $1.1$13.1 million for the three months ended SeptemberJune 30, 2017.2019.
On a constant currency basis using the average exchange rates in effect during the three months ended SeptemberJune 30, 2016,2018, cost of telecommunications services provided would have been lowerhigher by $0.4$6.4 million for the three months ended SeptemberJune 30, 2017.2019.
summarizes the major categories of selling, general and administrative expenses for the three months ended SeptemberJune 30, 20172019 and 20162018 (amounts in thousands)millions):
On a constant currency basis using the average exchange rates in effect during the threesix months ended SeptemberJune 30, 2016, operating expenses would have been lower by $0.2 million for the three months ended September 30, 2017. Selling,2018, selling, general and administrative expenses are the only operating expenses that would have been impacted by the change in exchange rates.
Our primary sources of liquidity have been cash provided by operations, equity offerings, and debt financings. Our principal uses of cash have been for acquisitions, working capital, capital expenditures, and debt service requirements. We anticipate that our principal uses of cash in the future will be for acquisitions, capital expenditures, working capital, and debt service.
Management monitors cash flow and liquidity requirements on a regular basis, including an analysis of the anticipated working capital requirements for the next 12 months. This analysis assumes our ability to manage expenses, capital expenditures, indebtedness, and the anticipated growth of revenue.revenue trajectory. If our operating performance differs significantly from our forecasts, we may be required to reduce our operating expenses and curtail capital spending, and we may not remain in compliance with our debt covenants. In addition, if we are unable to fully fund our cash requirements through operations and current cash on hand, we may need to obtain additional financing through a combination of equity and debt financings and/or renegotiation of terms of our existing debt. If any such activities become necessary, there can be no assurance that we would be successful in obtaining additional financing or modifying our existing debt terms.
We believe that our cash flows from operating activities, in addition to cash on-hand and undrawn Revolving Line of Credit Facility, will be sufficient to fund our operating activities and capital expenditures for the foreseeable future, and in any event for at least the next 12 to 18 months.months from the date of this filing. However, no assurance can be given that this will be the case.
Our largest source of cash provided by operating activities is monthly recurring revenue from our customers. Our primary uses of cash are payments to network suppliers, compensation-related costs, interest expense, and third-party vendors such as agents, contractors, and professional service providers.
Our primary uses of cash include acquisitions, purchases of customer contracts, and capital expenditures.
In addition to financial measures prepared in accordance with accounting principles generally accepted in the United States (“GAAP”("GAAP"), from time to time we may use or publicly disclose certain "non-GAAP financial measures" in the course of our financial presentations, earnings releases, earnings conference calls, and otherwise. For these purposes, the U.S. Securities and Exchange Commission (“SEC”("SEC") defines a "non-GAAP financial measure" as a numerical measure of historical or future financial performance, financial positions, or cash flows that (i) exclude amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in financial statements, and (ii) include amounts, or is subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure so calculated and presented.
Non-GAAP financial measures are provided as additional information to investors to provide an alternative method for assessing our financial condition and operating results. We believe that these non-GAAP measures, when taken together with our GAAP financial measures, allow us and our investors to better evaluate our performance and profitability. These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used by other companies. These measures should be used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures.
Pursuant to the requirements of Regulation G, whenever we refer to a non-GAAP financial measure we will also generally present the most directly comparable financial measure calculated and presented in accordance with GAAP, along with a reconciliation of the differences between the non-GAAP financial measure we reference with such comparable GAAP financial measure.
Adjusted EBITDA is defined by us as income/(loss) before interest, income taxes, depreciation and amortization ("EBITDA") adjusted to exclude severance, restructuring and other exit costs, acquisition-related transaction and integration costs, losses on extinguishment of debt, share-based compensation, and from time to time, other non-cash or non-recurring items.
We use Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures we use for planning and forecasting future periods. We further believe that the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and makes it easier to compare our results with the results of other companies that have different financing and capital structures. The 2017 Credit Agreement does not containIn addition, we have debt covenants that are based on a financial covenant for the term loan facility, but includes a maximum consolidated net secured leverage ratio that utilizes a modified EBITDA calculation.calculation, as defined by our Credit Agreement. The modified EBITDA calculation is similar to our definition of Adjusted EBITDA; however, it includes the pro forma Adjusted EBITDA of and expected cost synergies from the companies acquired by us during the applicable reporting period. Finally, Adjusted
EBITDA results, along with other quantitative and qualitative information, are utilized by management and our compensation committee for purposes of determining bonus payouts to our employees.
We are exposed to certain market risks. These risks, which include interest rate risk and foreign currency exchange risk, arise in the normal course of business rather than from trading activities.
Our exposure to market risk for changes in interest rates is primarily related to our outstanding term loans and revolving loans. As of SeptemberJune 30, 2017,2019, we had $694.8$2,595.8 million in term loans and $85.0 million in revolving loans with variable interest rates and no revolving loans.rates. The interest expense associated with our term loan and revolving loan will vary with market rates.
Our exposure to market risk for changes in foreign currency rate relates to our global operations. Our condensed consolidated financial statements are denominated in U.S. Dollars, but a portion of our revenue cost of telecommunications services provided and selling, general and administrative expenses are recorded in the local currency of our foreign subsidiaries. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. Dollar will affect the translation of each foreign subsidiary’s financial results into U.S. Dollars for purposes of reporting consolidated financial results.
Our management carried out an evaluation required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision of and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 and 15d-15 under the Exchange Act (“Disclosure Controls”).
Based on our evaluation, our CEO and CFO concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
The CEO and the CFO, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017,2019, and based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
From time to time, we are party to legal proceedings arising in the normal course of business. We do not believe that we are party to any current or pending legal action that could reasonably be expected to have a material adverse effect on our financial condition or results of operations.
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